Designer Holdings Ltd. develops, sources, and markets designer sportswear lines for men, juniors, and women under the Calvin Klein Jeans, CK/Calvin Klein Jeans, and CK/Calvin Klein Khakis labels, collaborating with the in-house design teams of Calvin Klein, Inc. to create a broad line of products that includes outerwear, knit and woven tops and bottoms, T-shirts, shorts, fleece shirts and pants, and caps and related accessories as well as jeans and khakis. Designer Holdings also owns and operates Calvin Klein Outlet Stores in North America and markets sportswear under the Bill Blass and Rio labels. After becoming a Calvin Klein licensee in 1994, the company quickly became a major player in the $20-billion-a-year denim market, boosting sales of Calvin Klein jeans sixfold in two years. Designer Holdings became a public company in 1996.
Rio Sportswear, 1984-93
Arnold H. Simon, Designer Holdings' cofounder, president, and chief executive officer, started out in children's apparel and underwear in the mid-1970s. Through a series of acquaintances he entered the denim business, founding Rio Sportswear, Inc. in 1984 with Stephen Huang to produce the material and market girls' and juniors' jeans under the Rio name. Simon was based in New York City, Huang in southern California. The company acquired the license to manufacture Bill Blass Jeans in 1987 and also obtained the manufacturing rights for Rifle jeans from Rifle Jeans Co. of Europe. Rio's extensive sourcing overseas included locations in Italy, Taiwan, Hong Kong, and Central and South America. Its products were distributed mainly through department and specialty stores. Company revenues were estimated at $30 million in 1989 and $60 million in 1990 and 1991.
Rio Sportswear added another line in 1992, when it signed a licensing agreement with L.A. Gear Inc. to produce under license women's and girls' jeans and a full line of woven tops and bottoms, including coordinated jackets for sale in department, chain, and specialty stores. "We're very excited to have Rio as our newest licensee," announced L.A. Gear's president. "They are known as one of the premier jeans manufacturers in the country and produce a well-designed, quality garment at a very competitive price." Rio had net revenues of $145 million in 1992 and $173.6 million in 1993. Net income was $3.6 million in 1992 and $2.1 million in 1993.
The Calvin Klein Deal, 1994
In February 1994 Rio and Calvin Klein entered into a letter of intent for Rio to buy Calvin Klein's men's and women's jeans divisions for $35 million plus ongoing royalty payments. Rio would acquire the assets of the Calvin Klein jeans business, which included a laundering facility in Nasquehoning, Pennsylvania, and a sewing plant in Abbeville, South Carolina. The agreement also called for Rio to receive the license to manufacture and sell Calvin Klein jeans and jeans-related products under the Calvin Klein label and to launch a children's jeans business in the future. The design studios and a showroom were to be maintained in Calvin Klein's offices in Manhattan's Seventh Avenue garment district.
Negotiations were impelled by Calvin Klein's decision to get out of manufacturing in order to focus on licensing and design. The Calvin Klein jeans business had been started in 1978 and by 1983 had reached a level of about $220 million a year. Soon after, however, sales dropped precipitously, and in 1992 all Calvin Klein casual clothes--mostly jeans--brought in only about $150 million. The company lost about $7.7 million in both 1991 and 1992 on this sector of its business. Retailers said the clothes--$60 or higher for a pair of jeans--were too expensive for the younger shoppers for whom they were targeted. Rio was expected to use its sourcing options to lower prices. Interviewed by Women's Wear Daily (WWD), Klein said, "A designer's name on a product is not enough anymore. It has to be well-designed, made, and priced. We were not able to lower the price on our own."
At this time Simon also was engaged in negotiations with Oshkosh B'Gosh Inc., one of the largest producers of children's wear in the United States. The talks involved the possible acquisition by Oshkosh of all of Rio's businesses for $65 million, although Simon intended to remain in control of the Calvin Klein jeans business. No agreement was reached, however. On the breakup of their talks, Oshkosh's chief financial officer said that his company and Rio "couldn't reach an agreement on the strategic direction of the Rio business," while Simon blamed "Oshkosh's unwillingness to deal with Calvin Klein" and later told a Crain's New York Business reporter that Calvin Klein "was too racy for them ... so I walked away."
But Simon's deal with Calvin Klein was also in jeopardy. Klein backed off from the deal in March, reportedly because of Rio's inability to finance it, and began talking to Fruit of the Loom. However, negotiations between these two companies ended in June, reportedly because Fruit of the Loom wanted rights to Calvin Klein's knit and woven casual sportswear pieces as well as jeans. Rio then raised its offer and came up with additional financing in the form of a partner, Charterhouse Group International, Inc., a closely held investment and buyout firm led by financier Merril Halpern.
Under their agreement, in August, Charterhouse (through Charter House Equity Partners II LP) acquired a 49.9 percent share in Rio, buying out Huang. In an earlier separate transaction Charterhouse and Simon had formed Calvin Klein Jeanswear Co., which completed the deal with Calvin Klein for around $50 million, exclusive of ongoing royalties and variables such as inventories. Designer Holdings Ltd. was created in March 1995 as the merged form of Rio Sportswear Inc. and Jeanswear Holdings Inc., which was the original holder of the Calvin Klein Jeans license.
Marketing CK Jeans and Khakis, 1995-96
Following the completion of the transaction, Designer Holdings implemented a number of initiatives to increase market share and improve the profitability of products under the Calvin Klein Jeans label. These included broadening the target market by reengineering the garments to provide a comfortable fit for a greater number of potential consumers so that, in Simon's words, "somebody other than Kate Moss could get into them." It also included increasing the value offered to consumers by lowering the price to between $45 and $52; targeting juniors', petites', and childrens' lines with a specific marketing strategy and product offering; expanding the core of basic styles for each line; and establishing an inventory replenishment plan to meet the requirements of retailers.
Calvin Klein Inc. created a youth-oriented advertising campaign for the jeans in 1995 that quickly incited controversy for showing young men and women in what the Wall Street Journal described as "suggestive poses." Amid outrage from a wide range of groups who were planning boycotts and picketing of stores carrying the designers' products, Klein called off the campaign, which was also criticized by President Clinton and made the subject of a federal investigation to determine if the models were under 18 years old. Klein later said he would reserve his racier ads for the European market.
According to Designer Holdings' 1996 description of its business, before it obtained the license Calvin Klein jeans were targeted primarily to the 30-to-50-year-old age group, and tailored to fit only a limited range of the consumer population. The company said it had subsequently designed, tailored, and targeted the products to both older and younger customers, including the teen market, thereby substantially increasing the potential market. Basic items, which change seasonally, accounted for 65 percent of Calvin Klein Jeans sales in 1995, while fashion items, continually updated, made up the other 35 percent. Denim Holdings contracted its manufacturing mostly to domestic companies, thereby allowing it to respond to trends quickly.
An amendment to the Calvin Klein licensing agreement in February 1995 added khaki pants, skirts, shorts, and related items to the Calvin Klein Jeanswear line, and a second amendment added caps. An aggressive advertising campaign ushered in the Calvin Klein Khakis Collection in March 1996, featuring narrow-hipped models--including Kate Moss--displaying, according to the New York Times, "equal measures of attitude and skin." The Times article added, however, that these advertisements were "much less provocative" than the jeans ads, and the full line included the popular baggy, oversized look. The khaki collection quickly became a $45 million business. A license for children's wear was acquired by Designer Holdings in early 1996.
The company had net revenues of $196 million in 1994 (including revenues as Rio Sportswear) and net income of $1.7 million. With the Calvin Klein business in operation throughout 1995, revenues shot up to $462 million and net income to $11 million. Licensee-generated revenues from the Calvin Klein Jeans line came to $361.4 million (with net income of $19.7 million), compared to only $59 million in 1993, when these products were controlled by Calvin Klein Inc. During 1995 KaiJay Pants Co., a subsidiary of Designer Holdings, was making Calvin Klein, Bill Blass, and Rifle jeans at the company's Pennsylvania plant.
At the beginning of 1996 Designer Holdings licensed the Rio label and sublicensed the Bill Blass labels to Commerce Clothing (25 percent owned by Designer Holdings), allowing the company to concentrate on high-end designer merchandise. The Rio and Bill Blass businesses generated about $101 million for Denim Holdings in 1995. Designer Holdings continued to market the products under the license and sublicense, receiving royalties from Commerce Clothing. In July 1995 Designer Holdings began distributing men's, women's, juniors', and petites' lines of Calvin Klein Jeans in Canada as well as in the United States.
Going Public and Further Developments, 1996-97
Designer Holdings made its initial public offering of stock in April 1996, selling 12 million shares of common stock at $18 a share and thereby raising, before expenses, $216 million. Some $34.7 million was earmarked to pay off a subordinated loan taken out in April 1995, with about the same amount to be used to retire an April 1995 loan from The CIT Group and other lenders. About half the stock was sold by existing shareholders instead of the firm. These included Simon, who held 46 percent of the company's shares subsequent to the public offering. Following the offering, New Rio L.L.C., whose controlling stockholders were Simon and Charterhouse Equity Partners II, held about 58 percent of the shares.
Investors not only snapped up Designer Holdings' offering of shares; within a few days they had bid the stock as high as $32.50 a share. One market observer told Investment Dealers' Digest, "A few years ago, the idea of a licensing operation going public would have been very odd. The market would have said it's a very nice brand name, but fashion is dangerous." Nineteen ninety-six was proving the year of the designer, however, with initial public offering of Donna Karan, Calvin Klein, and Mossimo also being grabbed by investors. Morgan Stanley & Co. Inc. and Merrill Lynch & Co., which co-managed Designer Holdings' IPO, forecast annual growth of 20 percent in the company's sales and 25 percent in earnings over the next three years and set target share prices in the mid-$30s.
In November 1996 Designer Holdings acquired 14 of the 15 existing Calvin Klein Outlet Stores owned by Calvin Klein Inc. in the United States and obtained the right to open additional outlets in the United States, Canada, and Mexico, together with the right to sell certain Calvin Klein-label goods in these stores. Simon said his company expected to open 50 more outlet stores in 1997.
Designer Holdings entered into a 30-year licensing agreement with a subsidiary of Donna Karan International Inc. in September 1996 for the exclusive production, sale, and distribution of men's, women's and, with certain exceptions, children's jeanswear under the DKNY Jeans label. The company saw DKNY jeans as supplemental to rather than competitive with Calvin Klein jeans, with the former directed to a more mature customer. The transaction dissolved, however, in March 1997. According to Simon, the major problem was Donna Karan's failure to deliver designs in time for his company to manufacture them. "They classically do things at the last minute and we don't do that," he told a Wall Street Journal reporter, adding that Donna Karan was late delivering designs for both fall and spring. Donna Karan International returned to Designer Holdings its initial $6 million payment and $1.26 million prepaid royalty.
Designer Holdings raised its net revenues to $480.4 million and its net income to $25.2 million in 1996, more than double the 1995 level. Nevertheless, investors expressed disappointment over the rupture of the Donna Karan deal and a statement by Designer Holdings that it expected revenues and profits to rise only slightly in 1997. The company's share price dropped as low as $6.62 in early April. Designer Holdings was reported to be looking for two licensing deals with nationally prominent designers--one for jeans and the other for lingerie or accessories.
Interviewed in 1996 by a Women's Wear Daily reporter in his garment district office, whose focus was a 300-gallon fish tank housing brilliant exotic species, Simon said he wanted to develop nonjeans businesses. "We'll look to two areas in the future&mdashtivewear, and underwear, which is where my background is." A Crain's New York Business reporter who interviewed him in 1997 described him as having a "stern meg and demeanor [that] make him a dead ringer for Marlon Brando." He retained about one-third of the company's stock.
Designer Holdings in 1996
Basic products, consisting of items such as jeans, T-shirts, shorts, shirts, vests, jackets, fleece shirts, and pants and caps, accounted for 60 percent of Designer Holdings' net sales in 1996. Fashion items, consisting of about 130 styles of bottoms and woven tops in the men's, women's, and juniors' lines, accounted for the other 40 percent. Men's products came to 41 percent of the total, juniors' for 36 percent, and women's for 23 percent. Seventy-eight percent of the company's goods were produced by U.S. vendors in 1996, 17.5 percent by overseas vendors, and 4.5 percent in the company's own production facilities in Nesquehonig, Pennsylvania, and Abbeville, South Carolina.
The Calvin Klein Jeans Label men's line was carried in 1,170 department stores and about 900 chain stores at the end of 1996. The juniors line was carried in about 1,120 department stores and about 650 chain stores, and the women's line, including petites in about 1,300 department stores and 250 chain stores. These lines were also available through smaller specialty stores and in about 150 shops within the stores of its major retailing customers. Federated Department Stores was the company's chief customer in 1996, accounting for 16.5 percent of sales, while May Department Stores accounted for 9.7 percent. Designer Holdings paid Calvin Klein Inc. $32.6 million in design and royalty fees in 1996 and received $2.2 million in royalties, primarily from the Rio and Bill Blass label products.
Principal Subsidiaries: Abbeville Acquisition Company; AEI Management Corporation; Broadway Jeanswear Company, Inc.; Broadway Jeanswear Holdings, Inc.; Broadway Jeanswear Sourcing, Inc.; Calvin Klein Jeanswear Company; CKJ Holdings, Inc.; CKJ Sourcing, Inc.; Jeanswear Holdings, Inc.; Kaijay Acquisition Company; New Bedford Shippers Corp.; Outlet Holdings, Inc.; Outlet Stores, Inc.; Rio Sportswear, Inc.