Designer Calvin Klein goes to court claiming a business partner is destroying his brand's image
By LAUREN GOLDSTEIN

Designer underwear may not be a logical concept, but as Calvin Klein can attest, it is highly profitable. Which is why boxers, briefs and other Klein-branded skivvies could soon be at the center of a high profile court case that will have New York's gossip-ridden 7th Avenue fashion district twittering at high volume. Last week, the designer stunned the industry by filing suit against Warnaco, the company which makes the jeans and underwear that bear his name. And to show he means business, Klein hired the firm of Boies, Schiller & Flexner, which was special trial counsel for the U.S. Justice Department in its case against Mircrosoft.

The suit alleges that Warnaco, and specifically CEO Linda Wachner, have damaged the brand image by selling to discount stores and putting Klein's name on designs he didn't approve. Described in the suit as a "cancer" on the brand, Wachner is also lambasted for her "abusive and unprofessional" management style

"The vitriol in the comments is astounding," says one former senior Calvin Klein executive. "It's going to be a very nasty battle."

Wachner was taken by surprise by the action, but quickly countered that the real reason for Klein's suit was his inability to find a buyer for his company. Klein put his business on the block last October, only to take it off in April. Industry experts said at the time that the $1 billion price tag was too high, and that his extensive agreements with Warnaco were a major hindrance. Warnaco controls about $1 billion of Klein's $2.5 billion annual wholesale sales. It also owns Klein's underwear business outright and has a license to produce jeans until 2034. Buy Calvin Klein and you're also buying Warnaco and Wachner. A spokesman for Klein said that Boies was retained in January — while the company was still on the market — and that the lawsuit has nothing to do with the failed attempt to sell the company.

Licensing is fashion's dirty little secret. Designers try to keep it quiet that clothes, makeup, underwear, shoes and other items sold with a designer label may not be made by the designers, but by a more mass market producer, like Warnaco or Nine West. Licensing has advantages for the designers. They get an expert in a specific product to do all the work — produce, market and distribute the goods — while they collaborate on design and collect a hefty fee. Lately, however, the strategy has fallen out of favor with high-end designers. Gucci, Giorgio Armani and Burberry have all bought back licenses to keep tight control over their brands. But none of them has had to go to these lengths.

The suit comes at a time when Warnaco is vulnerable. Saddled with debt from acquisitions, poor earnings and a sinking stock price, nearly 44% of Warnaco's sales — some $2.1 billion — come from Calvin Klein products. News of the lawsuit sent its stock spiraling and started rumors that its board would rather lose Wachner than Klein. But a trial is also bad for the Calvin Klein brand image. It will leave everyone wondering who's wearing the pants.

A Brazilian runway Amazon turns New York into S�o Paulo's sister city.

By DAVID E. THIGPEN

It was one of the mightiest engines in New York's fashion world. Using street-smart salesmanship to play on urban aspirations of upward mobility and suburbia's lust for hip-hop wear, the Tommy Hilfiger company roared past most of the Avenue's established houses to become the industry mass-marketing story of the 1990s. Even when its sales surpassed $1 billion a year and Tommy became fashion's Establishment, the models and hip-hop stars sporting his red-white-and-blue crest kept the company basking in an aura of cool.

So it came as an abrupt reality check on Wall Street this month when the company made the surprising disclosure that sales weakness in the coming year could chop earnings 40%. Tommy stock drooped like a rapper's baggy jeans, hitting its lowest mark in four years and giving up 30% of its value during one day.

As usual, Wall Street overreacted. But the plunge raised a question: How does such a hot brand catch the chills overnight? The answer reveals something about Tommy's strategies but also tells a story of the increasingly hostile climate for stand-alone giants like Tommy, Calvin and Ralph.

In part, Tommy may be a victim of its own successes. After a decade in which the company's average growth sizzled at 48% a year, some analysts fear Tommy's recent expansions into women's wear, perfumes and babygear may have pushed the brand to a saturation point. Tommy products are in 10,000 stores across the U.S. "They've tried to spin-doctor the brand in a dozen different ways without any big successes," says David Wolfe of the Doneger Group, a fashion consulting firm. Tommy's new upscale women's line has had several stops and starts. Says Wolfe: "It's the same strategic dead end Ralph Lauren faced, which is why he acquired [youth-market retailer] Club Monaco. You can only reinvent yourself in so many ways." Trying to buy its way out of trouble, Tommy stumbled in March when talks to acquire Calvin Klein foundered on licensing deals and Klein's steep $1 billion price tag. Tommy thus passed up a priceless publicity windfall, not to mention the $5 billion a year Klein pulls down at retail. Recent news reports have focused on planned closings of image-burnishing but money-losing Tommy stores in London and Beverly Hills.

Titans LVMH and Gucci vie for dominance in the fashion world
By KARL TARO GREENFIELD

Surrounded by hundreds of decanters of Dior's latest fragrance, J'adore, Bernard Arnault, 50, swivels in an ergonomic chair at the head of a metallic gray conference table on the 16th floor of midtown Manhattan's new LVMH tower. Forget Calvin, Ralph and even Giorgio or Miuccia —this narrow-faced, thin-lipped, dimpled Frenchman is the most powerful person in fashion today.

As founder and president of luxury-goods conglomerate LVMH Moët Hennessy Louis Vuitton, Arnault controls, in addition to the eponymous leather goods and spirits brands, Christian Dior, Givenchy, Celine, Kenzo, Christian Lacroix, Tag Heuer, Dom Pérignon, Ebel, the Paris department store Le Bon Marché, the DFS duty-free chain and the Sephora perfumery-shops, among other brands. Lately, he has been acquiring new companies at the rate of one a week: Bliss, Hard Candy, Fendi, Pucci, Urban Decay. "We look for hot companies, still small," says Arnault in his accented English, his voice a clipped tenor. "No one can do as much with a hot brand as we can."

Few people can do more with any brand than Arnault, who has built LVMH into a $40 billion company and amassed a personal fortune estimated at more than $6 billion. In the process, he has turned an industry that once consisted of hundreds of small, family-run companies into one dominated by a few luxury conglomerates, of which LVMH is pre-eminent. No other fashion brand is big enough to bid against him. Except one: Gucci.

Ironically, Arnault may have inadvertently midwifed the creation of his chief competitor. When Arnault launched a takeover of Gucci last year, quietly acquiring more than 20% of its outstanding shares —which he still holds —and then making an $8.7 billion bid for the whole firm, Gucci struck back by emulating the very business that was trying to acquire it. Gucci ceo Domenico De Sole and creative director Tom Ford started purchasing premium fashion brands in a bid to become a luxury superpower to rival LVMH.

So far it has worked. Gucci is arguably a hotter brand than any in the LVMH stable. And Gucci is seeking to bestow its panache on shoemaker Sergio Rossi and fallen couture house Yves Saint Laurent, in a series of deals valued at more than $1 billion. "We are going to apply our own business model to YSL," De Sole promises, "going from a licensed-type situation to a controlled situation." Last week YSL announced it would be cutting its licensing agreements from 160 to about 50 to protect the value of its brand. It doesn't hurt that Ford, arguably the premier designer in fashion, will be the creative director of the sleeker, sexier Yves Saint Laurent. And De Sole hints he is not done yet. "There are good opportunities," he says. "There are companies out there that can be bought. But I do have a limit. I have $2.5 billion." Unlike LVMH, De Sole indicates, he's not going to pay bust-out retail. For his part, Arnault sneers that Gucci and LVMH "are not comparable. Their sales are lower than our profits. That's like Microsoft's worrying about a start-up company."

Both Gucci and LVMH have been in fashion with investors, in part because Asia's recovery is viewed as a boon for sellers of swank. Gucci's stock, at $84.81, is off 33% from its 52-week high but still well above the $60 it was trading at a year ago, while LVMH, which trades in Paris, is up to $411 a share after reporting $8.4 billion in 1999 revenue, a 23% jump from last year.

American firms like Ralph Lauren, Donna Karan and Calvin Klein are finding it increasingly difficult to compete against these global luxury superpowers. Tommy Hilfiger's stock has also lost luster. So has Kiehl's, a 149-year-old posh beauty brand that was acquired last week by French global giant L'Oréal. In February, Klein, noting the sums Arnault has been paying and the increasingly treacherous fashion market, also put his company up for sale. Potential suitors —LVMH and Gucci among them —have shied away from Klein's privately held company because its licensing agreements would deny a buyer dominant control of its product lines.

And Arnault craves control above all else. Dubbed the "Wolf in Cashmere" by the European press, he is much more than a corporate raider of the runways. He is also the first reality-based fashionista, who pays as much attention to manufacturing costs as to designer trends. It is fitting: Arnault conducts business amid a backdrop of gallons of perfume rather than racks of couture outfits, because fashion is a sinkhole. You don't make profits from the glitzy couture collections, no matter how many lunching ladies and opec princesses visit your atelier.

Arnault has built an empire on the premise that high fashion is a marketing tool for selling handbags, shoes, makeup and bottles of J'adore. He views the gaudy, celebrity-driven Paris collections as spendy advertisements for his handbags and scents. No other design house has harnessed its collections so firmly to the task of moving mountains of leather and tubs of cosmetics.

To ensure that he brings in the buzz that drives the biz, Arnault hires edgy, critically acclaimed young designers who never made a centime of profit when they ran their own houses but who excel at engaging, exciting and infuriating the fashion press. Arnault points to John Galliano's spring collections for Dior this year as typical of what he wants from his designers. "His ideas are not meant to be worn," Arnault says of the avant-gardish collection of bag-lady-style ball gowns, "but the ideas descend down to prêt-à-porter and to everything in the line. And that's what we sell." So far, Arnault hasn't missed. The hype Dior generated on the runways facilitated the relaunch of the immensely successful and profitable Dior handbag line.

Off the runways, though, LVMH behaves like a cost-conscious maker of discount goods. Arnault has reined in expenses and, wherever possible, combined the production of his swank brands to create manufacturing efficiencies. Guerlain and Dior perfumes share plants, for example, as do Loewe and Louis Vuitton leather goods.

Among high-fashion potentates, Arnault has taken an early lead on the Internet. Individually and through Europe@web, a holding company and incubator of new firms, Arnault has made lucrative early investments in eBay, LibertySurf and Nomade (France's top Net portal). Coming soon: eLuxury, LVMH's luxury-goods portal, set to launch this month. "With our brands, we should be able to dominate on the Web as well," Arnault says, adding that he plans to take Europe@web public this year, possibly as early as next month.

Arnault hates to admit it, but he still desperately wants to make Gucci the jewel in the LVMH crown. The leather- goods maker is exactly the type of company Arnault knows how to maximize: a hot name with tightly held licensing and underexploited accessories markets. During the '80s Gucci became an overextended brand synonymous with suburban housewives. Starting in 1994, Gucci's De Sole and Ford began cutting back on licensing while focusing on building up the core fashion and leather-goods businesses. Ford persuaded celebrities like Tom Hanks and Madonna to don Gucci suits, and in just four years, he and De Sole took the company from $250 million to more than $1 billion in revenue.

Both men take great pride in their remaking of the company and were horrified when it looked like Arnault —of whom Ford has said, "We could teach [him] a few things about this business" —would capture Gucci. To fend off the raider, the partners brought in self-made French billionaire François Pinault, the owner of Christie's auction house and French store Pinault-Printemps Redoute, who used a controversial clause in Gucci's bylaws to purchase a 42% stake in the firm for $2.9 billion. Arnault insists Gucci's white-knight strategy was illegal, and the battle for the company is still wending through Dutch courts. (Gucci is incorporated in the Netherlands.)

With that battle raging, Arnault and De Sole clashed last November in a bidding war for Fendi, the maker of last year's to-die-for handbag, the baguette. Gucci's interest in the company probably forced Arnault to pay $200 million more than he would have otherwise before bagging Fendi for $950 million, a steep price for a firm whose net income last year was $20 million. De Sole insists Arnault overpaid for the company. Arnault, of course, vows to work his magic on Fendi. "It's a hot product with limited exposure," he says. "Perfect for what we can do in introducing it to a wider audience."

The immediate challenge for LVMH will be to squeeze more revenue out of its new, high-priced brands while retaining the luxe quality for which those brands are renowned. The specter of overlicensing haunts the fashion industry today, just as it did in the 1970s, when designers Pierre Cardin and Yves Saint Laurent weren't paying attention to where their names appeared and let their logos turn up everywhere, from discount pharmacies to five-and-tens.

Arnault swears that no matter how much he pays for his toniest brands, he will resist the impulse to recoup his investment by degrading them in that way. "If I'm patient, I can make it work at the high end," he vows. Just now there are more brands to buy, more couture houses to take over and more designers to hire. And don't forget, Arnault will remind you, he still has some unfinished business with a little company called Gucci.

The Italian fashion company outgrows its longtime creative genius.

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By Craig Offman

Benetton SPA announced that it has severed an 18-year relationship with advertising guru and photographer Oliviero Toscani. "It was by mutual agreement," said Mark Major, the company's U.S. spokesman.

In a statement issued last Saturday -- muted in its praise -- the Treviso, Italy, clothing company saluted Toscani "for his fundamental contribution to a new advertising concept." It also stated that Fabrica, the creative think tank once headed by Toscani and affiliated with Benetton, would take over as the company's main communications arm. Fabrica produces Benetton's in-house magazine, Colors, and has produced many of Benetton's most controversial campaigns, including the recent anti-death penalty series, "We, On Death Row."

Benetton and Toscani, who is creative director at Talk magazine, have picked an indelicate time to announce the departure. The $20 million campaign, which ended in March, depicted convicted killers in their prison garb without mentioning their victims. The ads precipitated a civil suit from the state of Missouri and the loss of a major client, Sears, Roebuck and Co. The California State Assembly called for a boycott of Benetton products.

Despite the contentious campaign, Benetton denies that Toscani's departure is related to the "Death Row" ads. "We've known that Mr. Toscani was looking for an opportunity to do something different," Major said. Indeed, a friend said that Toscani has been discussing a move and wants his teenage children to grow up in the United States. The source also observed that Toscani would have had a difficult time with Fabrica in its revamped role. "Toscani is his own person and anyone will recognize that he walks to his own drum."

Toscani could not be reached for comment, although he said in the Benetton announcement, "[I]t's good to have the courage to end something that has been fantastic and still have the enthusiasm to take on new projects."

Earlier this year, Toscani described his relationship to founder Luciano Benetton in papal proportions. "Can you imagine Michelangelo doing a church without the pope? Doing a painting in the Sistine Chapel without putting in Christ."

About the writer
Craig Offman is the New York correspondent for Salon Books.

Bankers dressing like Internet executives create the biggest threat to the suit in 100 years. Can it survive?
By LAUREN GOLDSTEIN

It's a colossal image problem. The staple of men's wardrobes suffered another blow last month as two more major investment banks, Goldman Sachs and Morgan Stanley Dean Witter, joined the growing ranks of corporations that have decided suits will no longer be required working wear.

This decision was not made because workers complained that their suits were uncomfortable. Nor did it come about because management decided suits hindered productivity. The decision was made, because a new generation of business school graduates has decided that working in someone's garage, in jeans, with the potential to make millions in stock options, is more interesting than working in a glass and steel office at the bottom of a rigid corporate ladder. And it was made because customers and the public are still (stock market corrections aside) fascinated with all things new and modern. Suits are not new and they are not modern. Companies that require them are not thought of as new and modern. To be pro-suit is to be anti-tech, to be trailing the bandwagon of billionaires pushing into the future. To be, well, dull. Lose the suits, gain instant credibility.

Anne Hollander, fashion historian and author of Sex and Suits, a book on the history of modern dress, compares the plight of the suit to that of the skirt in the 1970s, when feminists boasted, "I don't own a skirt." Six years ago, when dress-down Friday was still a new and exciting development and Internet companies were worth only millions not billions, tech entrepreneurs, too, liked nothing better than to rant against the suit: "If you don't have anything to say, wear a suit," said Bing Gordon, a co-founder of Electronic Arts, a maker of interactive games. "If a $1,000 suit makes somebody more confident, go for it. I bought a new pair of Levi's 501s this weekend," one of his vice presidents chimed in.

But when corporations try to institute this sort of renegade spirit it sounds, well, suit. "Following positive feedback from employees since the implementation of dress-down Fridays, we are pleased to announce that ... the Firm will adopt a 'business casual' dress policy throughout the year," began an internal memo at Morgan Stanley. Oh, joy.

The casual trend began in the mid-'80s when human resources departments in American corporations decided that a weekly dress-down day in the summer would be a fun, and free, employee perk. It would be easy to say, as many have said, that what is now a worldwide movement toward a casual workplace has killed the suit. And it's true that the news that thousands more bankers would no longer feel compelled to traipse down to Armani twice a year hasn't helped an industry that was already staggering.

Just look at who the notable suit wearers are in America today: basketball coaches, chauffeurs, talk-show hosts, maitre d's. Consider the number of manufacturers and retailers on both sides of the Atlantic who have fallen into financial difficulty because of the shift: Brooks Brothers, Hartmarx, Today's Man, Burton. The suit as in 'Corporation Man', as in 'The Man in the Grey Flannel Suit', as in dark suit, white shirt, silk tie each and every day, five days a week is dead. But that doesn't mean we'll soon watch it go the way of the bowler hat. After all, skirts are back — longer and shorter than ever.

The modern suit originated in America in the 19th century. Originally called a lounge or leisure suit it was designed for gentlemen to wear while relaxing at home. The suits confused and frustrated Europeans who could read all sorts of subtle class distinctions into the stripe of a pant, the weave of a vest, none of which was evident in the single-fabric American constructions.

Inexpensive machine-made versions were produced by the likes of Hart, Schaffner & Marx at the turn of the century and working-class men started buying them and wearing them out when dressed up. Early ads proclaimed: "You wouldn't know them from the work of the finest merchant tailor." In the democratic New World, upper-class men joined the trend, wearing their leisure suits to work — to the consternation of elders who continued to wear frock coats, striped trousers and vests. Young people dressing casually for work to the annoyance of stuffy elders ... Sound familiar?

The 1900's leisure suit had four or five buttons positioned high up the chest, a boxy body and natural shoulders. So did recent designs by the likes of Prada, Jil Sander and Giorgio Armani which were heralded by fashion critics as the height of modern. Most drastic attempts to change the shape of the suit in the past 100 years have failed. Often comically. Remember the Zoot suit? The mods of Carnaby Street? The Nehru jacket? The collarless jackets of Pierre Cardin? The fact that the basic shape of the suit has changed so little in the last 100 years is a testament to the strength of its design.

Ironically, it's the old-fashioned suit makers — those who sell handmade suits that start at over $1,000 — who are doing the best in this shrinking market. "The people who go to Savile Row don't regard wearing suits as a chore," says Hugh Holland, managing director of Kilgour French Stanbury, a Savile Row tailor. "They are the extraordinarily rich or those in love with clothes. Those who perceive the suit as stuffy come from a certain strata of society."

The rising Dow has pushed aside class considerations and broadened the profile of the hand-made suit afficionado. Hip British designer Paul Smith has a made-to-measure suit service in his newest London store in the trendy neighbourhood of Notting Hill. Prices start at $1,500 and business is booming. Why? "It reflects people's need to return to individuality — to things that are more personal," Smith says.

No one sells the message of hand-craftsmanship better than the Italians. Representatives from exotic places — Penne and Naples — regularly visit American malls and top European stores to wax lyrical about fabrics so light they're measured in microns; about workers in the Italian hills who sew by hand the 3,000 stitches in each lapel; about the one old woman allowed to cut buttonholes in the finished product.

Not only do you owe it to yourself to buy the $10,000 K model custom suit from Kiton — the argument goes — you owe it to them. After all, these suits aren't apparel, they're works of art. And thanks to the boom economy, there's great demand for art — for all things handmade. Men will spend vast sums of money if they think they're getting something precious. Men are buying these suits for all the same reasons one might buy a Picasso sketch and hang it in the bathroom: It's rare. It's classic. And it's discreet.

But success at the high end of the market isn't, as some in the business like to suggest, evidence of a mass suit revival. Neither is the fact that young men occasionally wear suits to dress up. Nor does it matter that most men look lousy in the jeans and chinos they choose for business casual. Or that designers continue to send suits down the runway. None of these takes away from the fact that the role of the suit has changed forever. Men, for the first time in a hundred years, are now free to say, "We will wear suits when and how we want to."

It's what women learned to do with skirts decades ago. Men are learning that there are more directions to dressing than just up or down. This newfound freedom has its consequences. The bankers at Morgan Stanley say they are suffering from DDSS — dress-down stress syndrome. "Morgan Stanley's London trading floor is a fashion shambles," says one employee. "Some in suits still, some in suits with no tie, visiting Americans in Banana Republic, expat Italians in club gear and a few in T shirts and jeans."

Casual wear is a struggle, but the suit is making life outside the office easier. For instance, a suit is now a common substitute for black tie. It may yet do to the tuxedo what the tuxedo did to white tie — push it forever from men's wardrobes. Removing the suit from standard daily office wear has also changed its meaning inside the corporate office. Steven Balmer, a lawyer for PricewaterhouseCoopers in London, says the PwC legal department has trailed the rest of the company in the move toward casual because, "to some the suit is still a sign of power."

To be suit is, for now, to be safe. The suit is still what to wear when you're not sure what to wear. The suit is the closest thing men have to the little black dress.