Warnaco Looking for Deals to Broaden Beyond Calvin Klein

Warnaco Group Inc. (WRC) wants something to come between it and its Calvin Klein brand.

With Calvin Klein representing more than three-quarters of Warnaco’s revenue, the New York-based company says it is on the hunt to acquire a major brand to help it diversify.

Warnaco may have little choice but to aggressively target fresh brands, not just to lessen its dependence on its 44-year old underwear and jeans label, but also to fend off possible threats of itself being acquired by the company from which it licenses the Calvin Klein name. PVH Corp. (PVH), which controls the Calvin Klein brand, has made attempts over the years to acquire Warnaco, and some investors worry it will try again, said Eric Beder, an analyst with Brean Murray Carret & Co.

“If Warnaco wants to be a truly global company with a domestic store base, they need to acquire a new brand that has U.S. stores,” Beder said. “An acquisition also would bring to an end investor speculation that Warnaco will be swallowed up by PVH.”

Among the companies which may be under consideration is Liz Claiborne Inc. (LIZ), which owns the Juicy Couture, Lucky Brand and Kate Spade labels, said Jeffry Aronsson, chairman of Aronsson Group LLC in New York, which helps develop fashion brands.

These labels appeal to younger, contemporary consumers, and can both fetch high prices while sustaining their own stores, said Casey Flavin, an analyst at Hedgeye Risk Management LLC, an independent equities research firm in New Haven, Connecticut. The labels are worth $2 billion, $350 million and $250 million, respectively, Flavin said.

Ann Stores

Warnaco may also be looking at larger deals, such as going after the nearly 1,000-store specialty retail network Ann Inc. (ANN), which operates some 280 Ann Taylor stores and 500 LOFT stores, Aronsson said.

Warnaco executives declined to elaborate on public comments for this article, said Wendi Kopsick, an outside spokeswoman for the company. Daniel Gagnier, an outside spokesman for PVH, declined to comment.

Liz Claiborne is “not currently contemplating” a sale of the company, said Jane Randel, a spokeswoman, in an e-mailed statement. ANN spokeswoman Catherine Fisher said “we do not comment on market rumor or speculation.”

Warnaco has the cash for such a deal, Beder said. The company had $232.5 million in cash and near-cash items at the end of its fourth quarter, 22 percent more than a year earlier.

Flexible Corsets

Warnaco, which started out as a maker of flexible corsets developed by Dr. Lucien Warner in the 1870s, obtained rights to the Calvin Klein brand in the 1990s. By that time, the company was being led by Linda Wachner, one of America’s most high- profile and highest-paid female executives. During her 14 year run, Wachner achieved impressive growth but eventually presided over the company entering bankruptcy in 2001, the same year she was fired.

Still, the legacy of the Wachner years is that the Calvin Klein rights have allowed Warnaco to make jeans, underwear and swimwear under that label and sell those in the more than 1,700 Calvin Klein stores it operates mostly internationally as well as through department stores. PVH bought Calvin Klein’s company from the founding designer in 2003, and remains the main owner of the brand, producing its women’s runway collection, men’s shirts and ties, and other goods.

Bronx Native

Bronx-native Calvin Klein, 69, who founded his company as a Manhattan hotel coat shop in 1968, built the brand into one of the world’s best-known labels. He is credited with creating the designer jean craze, helped by a young Brooke Shields, who declared in an ad campaign that nothing would come between her and her Calvins. Also memorable was the marketing campaign for his underwear, which featured scantily clad Mark Wahlberg on huge billboards. The brand generates $7.6 billion in total revenue, according to PVH.

Warnaco’s Calvin Klein jeans licenses expire in 2044 and 2046. It owns the Calvin Klein underwear and sleepwear trademarks as well as the Warner’s and Olga intimate-apparel brands and licenses the Speedo and Chaps brands.

Chief Executive Officer Helen McCluskey, who started in February, recognized the dependence on Calvin Klein and is focused on diversifying to increase returns to shareholders, Aronsson said.

“We’re frankly quite concentrated in Calvin Klein from a brand perspective,” Stanley Silverstein, executive vice president for New York-based Warnaco’s international strategy, told an investor gathering last month. “And as much as we love Calvin -- which we certainly do -- we would like to diversify that portfolio.”

Share Performance w

The company’s shares gained 6.2 percent this year before today, while PVH’s jumped 24 percent. The four-member Standard & Poor’s 500 Apparel & Accessories Index climbed 20 percent.

Without an acquisition, Warnaco may add $1.5 billion in revenue from its current portfolio by 2016, bringing total revenue to $4 billion, Silverstein projected.

As the company looks for an acquisition, it will have to compete with other large suitors that are on the prowl, Aronsson said. Warnaco also would be buying in a market where valuations have soared after Michael Kors Holdings Ltd. (KORS)’s initial public offering sparked interest in luxury brands, Silverstein said. Kors shares have more than doubled since the sale in December.

“It would excite people of they did an acquisition now, if it is considered a good fit,” said Diana Katz, an analyst at Lazard Capital in New York, who rates the shares neutral. “The markets have rallied with rumors of any acquisition.”

To contact the reporter on this story: Cotten Timberlake in Washington at ctimberlake@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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