20

We Liked Everything We Saw but Nothing We Heard

By 2003 the PVH company was a great company: it was professionally managed, well organized, and very well thought out. It ran like a bank. All the senior managers were very smart. We managed our inventory extremely well. We always made significant profits while maintaining a sense of fairness not only toward the people who worked for us but around the world as well.

However, we weren’t growing. Our assets weren’t stagnant, but they were definitely mature: we had a little growth but really no growth engine. We had plateaued, and we were growing only incrementally—about 2 to 5 percent a year. Because we were a public company, that wasn’t enough growth to satisfy our shareholders. The stock was languishing. We needed to raise the value of the company. At this point, I was president of PVH and a board member, and so this situation was one in which I was deeply vested.

It became clear that we needed a transforming transaction: something that would not merely change but transform the company. We started to look for opportunities, and we found several companies that we thought might be great for us to acquire.

We looked at a growing island lifestyle brand very closely, but we were concerned that it didn’t have enough product lines for year-round sales, and so we walked away from it and it was eventually bought by another company. We looked at another company that had a very big apparel conglomerate, about $2 billion in annual sales, but as we got close to buying it, I pointed out to the CEO that there wasn’t a single name in its portfolio that we could put over the door of a retail store because nobody really knew any of its brands, plus it needed fixing. We had spent a number of years fixing our company, so why open ourselves up to someone else’s headaches? We walked away from that deal, too.

Then we talked about acquiring Warnaco, which had gone into bankruptcy. Warnaco was the largest licensee of Calvin Klein (which was a publicly held company in bankruptcy), and it was being run by a turnaround company, Alvarez & Marsal, that had positioned it for sale. Warnaco’s product lines included Calvin Klein underwear, Calvin Klein jeans, Speedo, and several other brands that weren’t of interest to us (and I’ve therefore forgotten). We were really interested only in the jewel of Warnaco’s collection, which was the Calvin Klein business.

Earlier, I talked about how sometimes the best deal is the one you walk away from, and that proved to be true here, too. As we started doing our due diligence and looking hard at Warnaco, we liked everything we saw but nothing we heard. After all, something had put them into bankruptcy. We met with the managers of each division and asked all the relevant questions: Where are you in terms of market share? What’s doing well? What’s not doing well? What does your distribution look like? Are you important to your stores? How much volume do you do? The answers to all these questions were good, very good; we were feeling positive. The thrill of the hunt.

However, we found a red flag when we asked, What is it like working with the Calvin Klein Company? This was very important because the CK Company was the owner of the brand and had creative control over everything. Every time we asked this question, we got the same answer: they told us how difficult it was to deal with what they called “those fanatics.” Apparently, the CK people were very protective of their brand, and the Warnaco people told us that the Warnaco designs were controlled by the CK people: “If we said we need black turtlenecks, for example, they told us, ‘Well, we believe in purple.’ And we got purple, not the black that we knew we could sell.” I’ll never forget them telling us that.

As we met with each and every division, it became clear to us that Calvin Klein and the CK Company managed their image and the positioning of their brands so tightly that if we bought the Warnaco company, we would be putting our own franchise and business at risk. Although we respected the discipline of the brand and admired the “fanaticism,” we knew we couldn’t allow someone to have that kind of control over us, particularly in a transaction of this size and scope.

While we were mulling what to do, someone—I don’t recall who, but I think it was Peter Solomon, who was on our board—suggested that we buy Calvin Klein itself rather than Warnaco, following the old adage “Why buy the cow if you can get the milk for free?” In other words, why buy Warnaco out of bankruptcy if it was going to be so difficult dealing with Calvin Klein as a licensor? Why not buy Calvin Klein instead and have control over everything? It became very clear to us very quickly that this was an extremely exciting idea. Bruce decided we were going to go after Calvin, and he made it happen.

(I should mention that Peter Solomon welcomed me very warmly when I was made president of the company. We had a board meeting on the day it was announced to the company and the industry: when I walked into the meeting to present, as I would normally do, everyone was clapping, and there was an empty seat at the table. That was when they told me that I had also been given a seat on the board. On one side of me was Bruce, and on the other was Peter Solomon, and they both shook my hand and said, “Mr. President, you’re now a member of the board.”)

The Calvin Klein Company was privately held by Calvin Klein and his partner, Barry Schwartz. The company was divided primarily into two components: certain businesses that they ran themselves and a tremendous business that was licensed out to other companies. It was a royalty machine; for example, Warnaco had the license for Calvin Klein underwear and sold about $400 million worth annually (at that time) of that product line alone, for which CK received royalties. Warnaco sold another $500 million annually in Calvin Klein jeans around the world, for which CK also received royalties. In addition, CK licensed its name to Unilever for fragrances (Eternity, Obsession, and others), and CK collected royalties on those products, too. In total, the Calvin Klein company collected a very large royalty stream—announced at that time as $100 million a year—with a large infrastructure to manage, design, and control most of its licensees. If we bought the company, we would control them.

The Calvin Klein Company wasn’t officially for sale until we approached them with an offer to buy. Fortunately, at least one of the partners was interested in selling the company. Then several other companies became interested, and we got involved in a bidding war. We won, and we took over the Calvin Klein Company.

During the bidding war and negotiations, which took about three months, Bruce Klatsky and the CFO, Manny Chirico, focused on acquiring the funds to buy Calvin Klein. Meanwhile I, as the president and COO, focused on studying how the company ran, with the idea that when we took over, we would know all the businesses of Calvin Klein Inc. We would be prepared to develop new businesses and would know which businesses to license and which businesses or functions were to be changed or eliminated—in short, we were determining an operating strategy and vision should we be successful in acquiring the company. We knew the brand was strong. We knew it was run as a private company with a different expense structure (which a private company is entitled to do), but as a public company, we realized we had to streamline a lot of the operations, take out a lot of the costs, and focus the business on building and growing. That’s what we did, and it was a huge success

This deal wouldn’t have had a happy ending if we had bought Warnaco, as we originally intended, even though it would have been a transformational opportunity for the company. However, the risk associated with dealing with Calvin Klein’s apparent ironclad control was too great for us to take on. That risk was a critical component of our decision and one you need to keep in mind when you’re considering opportunities in your job or business. You have to be prepared to say no regardless of how enticing something is. No matter how attractive a deal is, there are times that you need to walk away, and when you look back later in life, it could be one of the best decisions you ever made.

We now owned the Calvin Klein brand. And by the way, for those folks from PVH who never heard of me after the sandblasting, I was the president of PVH and the chief operating officer. In addition to overseeing all of their businesses and brands, I had the operational responsibility for Calvin Klein. And the Calvin Klein CEO, Tom Murry, a very capable executive and a good guy, reported to me. We both learned from each other and built this brand.

A little later on my life at PVH was to change. But I will never forget, after being at Calvin Klein for about a year, after the board applauded our efforts, my management teammates were up at Calvin with Tom and I and we watched them try to make phone calls. They couldn’t. To dial out at Calvin you had to start with 8, not 9 as in PVH. Just goes to show you who did the work!