Q&A With Joseph Gromek, CEO of Warnaco

The Robin Report - Joe GromekWarnaco’s (WRC) performance since CEO Joe Gromek arrived in 2003 has been spectacular. He inherited a company that was just coming out of bankruptcy, and had suffered a bottom line loss of almost $900 million in 2001 on sales of $1.6 billion and a loss of almost a billion dollars on sales of $1.4 billion in 2002. Starting with his first year, and every year thereafter, except for a negligible dip in income in 2008 and revenue in 2009, Warnaco enjoyed double digit growth on all key metrics. The company sailed through the Great Recession as though it didn’t happen. Sales now stand at about $2.3 billion, operating margin at 11.4%, and operating income at $262.7 million.

Q. Joe, can you give us some background on the turnaround efforts put in place before the recession, and highlights of how you were able to get through the recession with only minor hiccups and outperform the majority of players in this industry? Was there something about your business that “insulated” Warnaco from the full impact of the recession?

A: The real power behind Warnaco, even going back to 2003, is our portfolio of great brands, with Calvin Klein the jewel in the crown. We also had incredibly good people in the business. The middle management teams were sound, and we added a new senior management team to guide them. That made a big difference in the culture of the company. The first thing we did when the recession started was focus on reducing our costs. We knew US revenue was going to head south. We focused on corporate SG&A. We started using video conferencing instead of traveling around the globe, and did some other things as well, which helped cut expenses about 10%. We didn’t stop the growth initiatives we had in place, though. In fact, we opened up more square footage than we ever thought we could, and our international retail business continued to grow dramatically. These businesses give us our highest margins – in some cases almost double those in the US – offsetting what was going on in the US and parts of Europe as well. Heritage plus CK in the US dropped 11%.

Q. What was the overriding strategy of the company when you took over?

A. In 2003-2004, we focused on efficiency and execution, and made some large strategic moves. One was to exit manufacturing. We had swimwear and intimate apparel manufacturing operations in Mexico and the DR, but felt that brick and mortar was not the right thing for us, so we sold those businesses at a cost to us. Putting 6,000 people out of work was not something we wanted to do, so we found management to sell those facilities to so they would continue to run and support us. The other thing we did was to integrate sourcing into the operation rather than use agents. I brought in two former sourcing colleagues, and within days we had a 200-person owned sourcing operation at Warnaco. Service improved and costs were cut almost in half.

Q. How did the brand strategy evolve?

A. We went through a strategic review of our brand portfolio, and decided it made sense to exit certain businesses and focus on others, and to look at some strategic acquisitions as well. First, we tried to buy the assets of Speedo from the UK-based brand owners, but they had no interest in selling the brand, because it’s such a nice source of cash flow for them. Neither were they interested in buying the business from us. So we decided okay, it’s a great brand, we’ll keep it. The second thing we did was buy the balance of the rights to the Calvin Klein Jeans business. That suddenly produced a very different Warnaco. It gave us the global rights to Calvin Klein Jeans, European and Asian rights to accessories, and rights to the bridge collection in Europe. We became a $300 million business with a 10% EBITDA almost overnight, and today that business has doubled, and we’re truly a global operation. We’ve been able to renew all licenses with Calvin Klein Inc. (owned by Phillips-Van Heusen – PVH) for 40 years.

The Robin Report - WarnacoQ. So what part of this new strategy helped you weather the recession better than your peer group guys?

A. Our business had suddenly changed – Calvin Klein became the growth vehicle of the company. We would grow through international expansion. The CK Jeans and Underwear retail businesses were about 15% of total sales, but now are 30%. We used the heritage brands Speedo, Chaps, Warners, Olga and others, which at $600 million in sales were 30% of the business, to be the cash generators. That’s been our strategy for the past five years. We also became retailers. On average we’ve been growing our retail footprint by over 20% per year — this year alone adding 150K sq. ft., last year 200K. Our stores do on average $800 per square feet. So if we grow by 200K sq. feet we add $160 million to revenue.

Q. What about swimwear?

A. Swimwear has been a good business. The Speedo brand has a 70% market share of the $70 million competitive swimwear market in the United States. It’s bounced back since the recession, and provides a good deal of cash to support our other businesses. We’ve tried to get Speedo out of the water, onto the shore, but we’ve stubbed our toe. Next year we’ll see a revenue spurt – we get one every four years from the Olympics.

Q. Since close to 60% of your business is international, and the fastest growing segment, how do you manage through currency fluctuations?

A. As the recession was taking hold and the dollar experienced some strengthening, we got caught with our pants down in the UK and Europe. We brought in a new treasurer in 2009, whose sole job is to manage the currency risk, and developed a hedging program to reduce volatility. We do business in 112 different countries, and have 6 baskets of currencies that we pay close attention to. When 60% of your business is overseas, it becomes much more complex.

Q. Do you run your own international stores? And where are they?

A. Of our 2,000 points of distribution, we operate 1,400 ourselves, and we have 600 that third parties operate. Our stores are in Europe, Asia and Latin America. Brazil is our fastest growing market. Money-wise our biggest growth market is China. China will be the largest country other than the US. As a region, Asia will surpass the US within another 4-5 years. For most of the world, what we’re selling is aspiration. Our brands are also the entry-level price for the luxury customer. In the emerging markets, where we do most of our business, the luxury consumer population is growing rapidly, and really fueling growth.

Q. What do you think the global awareness of the Calvin Klein brand?

A. The awareness factor is incredible. Neilsen did an awareness study in India, and Calvin Klein was the #2 brand in awareness, after Chanel. We hadn’t even sold one piece in India. CKI spends close to $300 million per year marketing its image of modern, sexy, minimalist, downtown – which works in all geographies. In emerging markets, they wear a pair of underwear that costs $30 to show it, to say “I’m successful, and I’m wearing Calvin Klein underwear.” That’s been the reason for our growth.

Q. Where are we in the economic recovery, and when is the end of the recession?

A. This is as good as it gets right now in the US. This is the new norm.

Q. That’s a major statement. Everybody’s talking about recovery, recovery, as though it’s going to go back to the way it was. Given that statement, what will the inflation effect have on everything across the board? With denim such a large part of your business, will you offset cotton price increases or try to pass them along? Are you forecasting a decline in number of units?

A. Inflation is real, costs are rising rapidly. We will certainly attempt to pass some of it along, but “can we sell the same quantities?” becomes the issue. I think consumers will acquire and purchase less. The demand curve will contract. In our own Calvin Klein stores we have the best chance. The intrinsic value is understood in a very different way. I think where we will have a greater challenge is in the domestic market here, and in Western Europe. Denim represents about 30% of the $800 million CK Jeans business, or $240 million in revenues, which is 10% of corporate sales.

Q. How many stores do you have in the US?

A. One store. We don’t have the rights to the Calvin Klein jeans stores in the US. In the bankruptcy those were given back to Phillips-Van Heusen. They operate 125 factory outlet stores that we provide the product for, which are very profitable for them.

Q. Are you looking for acquisition candidates?

A. Our company generates free cash flow of about $300 million a year, so we have the ability to add to the portfolio. We’ve been very quietly acquiring businesses in China, Taiwan, Singapore, and in parts of Europe, but they were Calvin Klein distributor businesses. There are still 600 stores that we don’t control, so there’s opportunity to acquire more. We cut out the middle man, and get the full retail revenue. In addition, we’re looking for brands that have the ability to be global lifestyle dual-gender brands using our unique global infrastructure. But we don’t need an acquisition to grow, and we believe that our margins will continue to expand. We have what could be considered the best global lifestyle apparel brand today, and we can grow in double-digit fashion today. It’s a high-class problem. We have to find the right thing. We can’t allow the money we have to burn a hold in our pockets, though — we have to be very judicious about this thing.

Q. Any pressure from retailers for exclusivity?

A. One of the best brands we have in the portfolio is Chaps. We’ve had the sportswear license since 1978, and 50% of the business is Kohl’s (KSS) – the balance are other department stores. I think most people think Kohl’s has an exclusive. The brand has done incredibly well during the recession. We create the product in the Polo image (Ralph Lauren (RL) is the licensor). Last year it grew 21% for us. It’s a great product, a great license, and for us a great opportunity.

Q. Do you think at some point in time it would give you a greater opportunity to have any of your main brands exclusive with a particular store, for example?
A. The Calvin Klein brand performs at a very high level at Nordstrom (JWN), Bloomingdale’s, etc., so when you’ve got that kind of power – I’m sure a dominant retailer would love to have it, but I don’t think it’s in the brand’s best interest to make it exclusive to one retailer.

Q. If a department store were to begin leasing space to outside brands, would you be interested? I always use the example of intimate apparel, because the department stores have been losing share for some time there. How do you view that whole thing going forward?

A. We operate concessions in 800 locations around the world. We control everything – the inventory, sales staff, marketing, fixtures – and it’s incredibly profitable. We own everything except the space, but we pay rent and take advantage of the store’s traffic. We have history with it globally, and we’d like to see it in the US. I think we’d win big if we were to do that. We’ve broached the subject, but since the retailer would not get the full retail, it hasn’t gone anywhere. As time goes on that might change.

Q. Calvin Klein represents three-quarters of your business. What does the future hold?

A. We’re on track to double the business in five years. Most of the growth will come from international expansion and our own retail initiatives. We think we can get that to north of 5,000 Calvin Klein Jeans and Underwear stores.

Q. Is there a threat beyond your control from the other licensees if they do something to taint the brand? Critics have said that some of the women’s product sold here is very mainstream. Also, is there a black swan out there that could pose risks?

A. Calvin Klein Inc. has very good brand stewards, and they’ve done a very good job policing the brand. The women’s sportswear products which are very popularly priced here have been very successful. Quality requirements are different in Europe and Asia than in the US. We’re selling a $50 women’s jean in the US, but a $160 pair in Asia, and the quality is different. In other parts of the world we’re offering a more premium operation. You play to the market. The propensity to pay more for apparel is higher in Europe. They’re very fashion conscious, and clothing represents a bigger part of their personal budget, and we like that. We’ve added $1.1 billion in retail sales to the total sales of Calvin Klein over the past 8 years, and the folks at CKI appreciate the way we’ve been doing it. We have an excellent relationship with Tom Murray, Bruce Klatsky, Manny Chirico, and others there. The total Calvin Klein business is now over $7 billion at retail, a huge business. However, if we were to approach $4 billion, we’d be an even more important part of it.

Robin Lewis About Robin Lewis

Robin Lewis has over forty years of strategic operating and consulting experience in the retail and related consumer products industries. He has held executive positions at DuPont, VF Corporation, Women’s Wear Daily (WWD), and Goldman Sachs, among others, and has consulted for dozens of retail, consumer products and other companies. In addition to his role as CEO and Editorial Director of The Robin Report, he is a professor at the Graduate School of Professional Studies at The Fashion Institute of Technology.