Kenneth Cole Productions (NYSE: KCP) makes urban contemporary apparel, footwear, and accessories for men and women in their 20s and 30s. Their designs range from suits for the office, to more casual and trendy dresses and jackets for after-hours wear. Kenneth Cole brands itself as an "affordable luxury" company. In support of this image, the company offers brands that sell at a range of price points, including the premium Kenneth Cole New York line (where a pair of women's dress shoes costs up to $200) as well as its mid-market Reaction brand (where a pair of women's dress shoes sell for around $60 to $80).
Kenneth Cole generates its revenues almost exclusively in the U.S. Moreover, as a "near luxury" retailer, Kenneth Cole's targets middle-income consumers who are more apt to cut back on spending during periods of economic weakness than upper income individuals who have greater discretionary income and are less affected by economic downturns. These two factors make the company particularly vulnerable to U.S. economic downturns.
In 2009, KCP earned a total of $410 million in total revenues, a decline from the previous year's $492 million. 2009 marked the 4th straight year in which revenues declined. Unsurprisingly, its net income was adversely affected as well. In 2009, KCP's net loss increased, from a loss of $15 million in 2008 to a loss of $63 million in 2009. KCP's net income has also been declining for the years 2006-2009.
Kenneth Cole's revenue can be broken down into three main segments:
The Kenneth Cole brand is at present largely dependent upon its wholesale retail business, which accounts for roughly half of its revenue. The company has close relationships with several major retailers, the ten largest of which account for over two-thirds of net sales. Kenneth Cole apparel and accessories are sold at 6,000 specialty and department stores, in addition to the private label merchandise that the company makes for some retailers that choose not to sell their branded apparel.
====Consumer Direct (41% of 2009 net revenues)==== Kenneth Cole operates 49 retail stores and 42 outlet stores in the United States, as well as through its website. Each of these store's results have a major effect on Kenneth Cole's bottom line. Amid a weak economy, disappointing consumer direct sales contributed to the 5 percent decrease in net revenues. As a means of reinvigorating the segment, the company closed six underperforming stores and took control of its men sportswear line, which was originally sold via a licensing agreement.
Kenneth Cole has licensing agreements with several companies, which serve as a means to broaden the exposure of Kenneth Cole to brands and business segments that it normally would not have access to (e.g. fragrance, watches, and eyewear).
With 97 percent of its income generated domestically, Kenneth Cole is can be considered an exclusively U.S.-based business. When domestic consumer spending decreases in tough economic times the company cannot count on stronger economies abroad to support its earnings. But although Kenneth Cole has yet to pursue a plan for major international growth, the company has decided to focus on developing its brands’ images abroad via continued licensing agreements with optical and watch companies. The company’s licensees opened 26 new stores in international markets such as Latin America and the Gulf Region.
Although Kenneth Cole products are sold almost exclusively in the United States, essentially all of its products are manufactured at foreign-owned factories abroad. This exposes the company to exchange rate changes that tend to increase the volatility of earnings. As a hedge against fluctuating exchange rates, Kenneth Cole has entered into "forward exchange contracts" with international businesses that lock in a certain exchange rate for purchasing goods.
From the company’s inception, Kenneth Cole has always targeted young, urban, and fashion conscious men and women with trendy clothing and accessories that are relaxed yet professional. This strategy paid off for the company during the first half of this decade, as the U.S. economy performed extremely well. However, as consumers (particularly the younger, less established consumers that form the base of Kenneth Cole’s market) have less discretionary income in periods of weaker economic growth, the economic downturn has taken a toll on apparel companies- as a result Kenneth Cole's revenues and net income have declined between 2006 and 2009.
However, Kenneth Cole’s business does have segments which serve to mitigate the impact of this trend. The company’s licensing business, which focuses on less expensive items such as fragrances and eyewear, gives less affluent customers access to Kenneth Cole merchandise at a lower price point.
As over half of Kenneth Cole's revenue comes from its wholesale business, it depends highly on its contracts with these companies for revenue. Given the frequent consolidation among department stores over the past decade (e.g. Federated Department Stores' 2005 takeover of Marshall Field's), stores have faced reductions in the size of their contracts with these retailers. Any such reduction would have a significant impact on revenue.
Kenneth Cole competes with apparel manufacturers and retailers who target fashion-conscious 20 and 30-year old men and women. It's recent acquisition of the Le Tigre brand (which sells a popular line of polo shirts) puts in directly in competition with two other companies: Phillips-Van Heusen (which owns the IZOD brand), and Polo Ralph Lauren.