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OCTOBER 29, 2007
The New King Cole Long known as Kenneth's unlucky kid brother, Neil is vindicated as his Iconix soars amid industrywide stagnation For two decades, it was Neil Cole's distinctive burden to be known as the loser brother of fashion icon Kenneth Cole. While Kenneth parlayed one triumph into another as designer, social activist, and CEO of apparel maker Kenneth Cole Productions (KCP ), younger brother Neil struggled to build a fashion company of his own. Neil had his successes, too, but they were followed by crushing reversals. In launching Iconix Brand Group (ICON ) in 2004, Neil restarted his career for the fourth time. Kenneth, 53, is still the celebrity in the family, but now it is Neil upon whom fortune--and Wall Street--is smiling. Neil, 50, finally got it right by building Iconix on a novel, licensing-only business model that positioned the company to profit from the woes afflicting traditional apparel companies like his brother's. "There seems to be common acknowledgment that the path Neil has chosen is a growth vehicle at a time when not much else is growing," Kenneth says. In 2007's first half, Iconix posted a 75% jump in net income, to $27.5 million, as revenues more than doubled, to $69.9 million. Meanwhile, Kenneth's company reported a 29% decline in earnings, to $6.7 million, on a 4% dip in revenues, to $248 million. Kenneth Cole Productions remains much larger than Iconix by the measure that counts most to shareholders: stock market value. At $390 million, its market cap is less than one-third of Iconix's $1.3 billion. Iconix, a kind of virtual fashion company, operates out of a nondescript office building in New York's garment district. It owns brands that will generate a robust $5 billion in retail sales this year and yet it has just 65 employees. Neil's forte is acquiring trademarks of long-lived brands that have fallen on hard times and reviving them through new licensing arrangements and marketing campaigns. The beauty of his business model is that it shifts all the risks of producing and distributing goods to licensees, which pay Iconix a guaranteed royalty of 4% to 10%. The Kenneth Coles of the world, meanwhile, face far more uncertainty. In recent years, apparel companies have had to cede control over pricing to increasingly large and powerful retail chains. That means they must bear the risks of moving inventory through far-flung global supply chains without knowing whether the likes of Macy's (M ) or Target (TGT ) will set a high enough retail price at home to provide them a decent return. Many apparel makers are trying to reignite sales by opening their own stores and selling off marginal brands. Capitalizing on a robust buyer's market in fashion properties, Neil Cole has shelled out $730 million over the last three years to buy nine apparel brands, including such familiar names as Danskin and London Fog and such hot ones as Badgley Mischka and Rocawear, co-founded by Shawn "Jay-Z" Carter. In September, he made his biggest acquisition yet, paying $231 million to acquire houseware brands Cannon, Royal Velvet, and Fieldcrest. "This is transformational for Iconix because it shows that we're not only about fashion," he says. "This is the beginning of our diversification." The suggestion that Kenneth Cole Productions might make a nice next acquisition for Iconix neither amuses nor appeals to Neil in the slightest. By all accounts, the Cole brothers remain staunch fraternal allies despite the divergence in the performance of their companies. "I never had an issue with my brother my whole life, to this day," Neil says. "Besides, if you look at our personal market caps, he's still far ahead." Kenneth's 46.8% interest in Kenneth Cole Productions is worth about $170 million, while Neil's 5.8% of Iconix is valued at $70 million. A DIFFERENT CLOTH In some ways, Kenneth and Neil are a study in contrasts. Kenneth cuts a far more aggressively stylish figure than Neil, who is corporate in his tastes and who can look a bit disheveled even in the Prada and Armani suits that he favors. While Kenneth is beloved for his quirky intelligence and social consciousness--"a mensch of the first order," one admirer calls him--Neil is a lawyer by training with a vaguely diffident manner and rough edges that he took a long time smoothing. "Some people win arguments by shouting louder and longer," says one former Iconix director. "Neil used to be that kind of executive." Says Cole: "In my 25-year career, I don't remember raising my voice more than five times." Far more significant are the aptitudes that the brothers have in common, notably an intuitive feel for marketing and a penchant for provocative advertising. These shared traits were forged in apparent opposition to the former Marine who gave them both their start in business: their father, Charles J. Cole, a shoe manufacturer, who died in 1993. "He believed that advertising was a weakness," Kenneth said in an interview elsewhere. "It was a sign that you needed business." Even so, Kenneth says, "I know for sure that my father would have been very proud of Neil and what he's accomplished." The brothers grew up in affluent Great Neck, N.Y., the middle pair of four siblings in a close-knit family. Charles was the owner and founder of a ladies shoe company called El Greco that operated a factory in Brooklyn. He put all four kids to work there during the summers of their teenage years. Neil also learned the business from the retail side, as a stock boy and salesman at shoe stores owned by El Greco customers. Neil was off at the University of Florida in 1978 when Charles and Kenneth made a buying trip to Italy and came across a shoe--the Candie slide--that transformed the Coles' fortunes. The wood-bottomed slip-on with the tapered high heel instantly became a signature shoe of the late disco era, sending El Greco's sales soaring from $3 million to $190 million by 1984. As El Greco boomed, Neil became so infatuated with Candie's licensing potential that he went on to law school after graduating from Florida to study trademarks. "I loved the idea that you could license your brand to someone and you didn't have to do anything except cash the checks you got in the mail," recalls Neil, who earned a degree from Hofstra University School of Law in 1982 and then joined the family business full-time. Working for Charles proved as exhilarating as it was exhausting. "We used to go in at 6 in the morning and leave at 8 at night," Neil says. "It was a war room. Everyone just loved it." But not for long. Both brothers increasingly chafed under their domineering, old-school father. Kenneth was the first to quit, resigning in 1982 to found Kenneth Cole Productions. Charles twisted the knife by promptly promoting Neil to president--a title that Kenneth had coveted but never received. Neil lasted three more years, impulsively resigning--"I may have thought about it for a day or two"--to start a company he pointedly called New Retail Concepts (NRC). Not that it was all Charles' fault. "My father, Kenneth, and me are alike. We're all kind of stubborn," Neil says. "My father bred two CEOs." Kenneth put up some of the money Neil used to start NRC and has remained a significant shareholder in his brother's businesses since, taking care to remain below the 5% ownership level that triggers mandatory disclosure. Despite going their separate ways, the brothers maintained a close relationship that went far beyond their frequent attempts to beat one another at golf. "Neil would always run marketing ideas by me and me by him," Kenneth says. "We were each other's sounding board and voice of reason." With NRC, Neil tried to conjure another Candie's-style windfall, this time from a fusion of licensing and the sort of brand advertising his father so disdained. Neil dreamed up a brand called No Excuses and cut licensing deals with two dozen suppliers for jeans, shoes, and handbags. An audacious 1987 ad campaign starred Donna Rice, then recently outed as the mistress of Presidential hopeful Senator Gary Hart, under the tagline, "I have no excuses. I just wear them." The timing of the Rice ads embarrassed Kenneth, who was about to marry Maria Cuomo, daughter of New York Governor Mario Cuomo. "In a lot of people's minds, my father-in-law was a prospective candidate for an office that Donna Rice was involved in dethroning," Kenneth said at the time. His wedding followed by two years Neil's marriage to former Miss USA Kim Seelbrede. The No Excuses experiment was working, but too slowly to suit Neil. Convinced that the best way to impress Wall Street was to rack up bigger revenues, he took back the main No Excuses jeans license in 1989 and began making the line himself, contracting with factories in Haiti, Costa Rica, and other countries. Beset by all sorts of operational snafus, including a huge batch of white acid-washed jeans that turned yellow, NRC took heavy losses. Neil ended up selling No Excuses, and the brand faded into oblivion. In 1991, Neil rebooted, paying $3 million to buy what remained of the Candie's franchise, which had more or less collapsed after Charles sold El Greco in 1986 and retired. Kenneth had no desire to wade back into Candie's, but understood Neil's desire to salvage a brand so closely identified with their father. "My father cast a big shadow in what he did," Kenneth says. "I'm sure it was hard for Neil to deal with the Candie's brand being as pervasive as it was for as long as it was. It's great to see how he's come through that." Neil got off to a fast start, improving Candie's Inc.'s selection of midprice footwear while cutting licensing deals for hosiery, eyeglasses, handbags, and perfume. The buzzmaker this time was an ad showing former Playboy pinup Jenny McCarthy sitting naked on a toilet in her Candie's. In 1998, Neil set about trying to revive a second brand after Candie's Inc. paid $15.6 million for jeansmaker Bongo. Once again he plunged deep into the complexities of manufacturing, a mistake that took a while to catch up with him. Cole's company booked $115 million in revenues in 1999, up from $38 million in 1996. But even as Neil rejuvenated Candie's the brand, he lost his grip on Candie's the company. In late 1999 Candie's restated earnings for seven quarters. The Securities & Exchange Commission alleged that the company's chief operating officer, its chief financial officer, and others inflated sales through dubious accounting methods. An investigation by Candie's board found that Neil was unaware of the alleged fraud. "We concluded that Neil was not part of any conspiracy, but that he should have ferreted it out," says Barry Emanuel, the Candie's director who headed the probe. The SEC ultimately fined Cole $75,000 for "recklessly" approving a press release containing phony figures. Cole's inattention extended to the operating fundamentals, which spun out of control. Sales swooned, costs soared, and Candie's posted a horrendous $25 million loss in 2000--the same year that Neil's 15-year marriage ended in divorce. "I call them the dark years," he says, referring to 1999 to 2003. Neil eventually decided to play to his strengths by doing what he'd set out to do in buying back Candie's in the first place: to build a licensing-only company that would free him once and for all of the complications of manufacturing, warehousing, and distribution. The single most important transaction in Candie's transformation into Iconix came in late 2004. That was when Neil signed up Kohl's (KSS ) as Candie's sole U.S. licensee. Kohl's ignored the skeletons piled in Neil's closet. The licensing deal "was strictly based on the appeal of a brand with very high consumer awareness," says Kevin Mansell, Kohl's president. Sales of Candie's merchandise should top $300 million this year, up from $40 million when Kohl's licensed the brand. Neil since has negotiated three other major direct-to-retail deals, licensing Joe Boxer to Sears Holdings (SHLD ) for sale both in Kmart and Sears stores, and the billion-dollar sportswear line Mossimo to Target. In August, Iconix signed up Target's archrival, Wal-Mart Stores (WMT ), as the exclusive U.S. licensee of the surfwear pioneer Op brand. Iconix's growth gave Neil a lot to celebrate when he turned 50 this past March. He rented out a swanky Chelsea art gallery for a celebrity-studded bash that affirmed his newly ascendant status in business and fashion. Neil and his second wife, Lizzy, assembled a guest list that included Stan O'Neal, CEO of Merrill Lynch (MER ), which has syndicated several loans for Iconix, and Beyoncé and boyfriend Jay-Z, who formed a joint venture with Neil to scout new opportunities in apparel. The celebration continues on Wall Street. Almost all the analysts who follow Iconix rate it a buy. There remains, however, an undertone of unease even among true believers in Iconix's model, as they scrutinize the company for signs that Neil's entrepreneurial reach might again exceed his managerial grasp. Skeptics suggest Neil overpaid for recent acquisitions in his eagerness to add heft to Iconix. But the most common criticism is that Iconix is understaffed. "Management ranks are very thin," contends Robert D'Loren, a former strategic adviser to Iconix who now runs a competitor called NexCen Brands. Neil, who envisions Iconix owning as many as 25 to 30 brands, concedes that he needs help in finance and other nonmarketing areas. He insists, though, that he is getting all the management support he needs and that he'll designate a second in command sometime in the next year. "It's definitely a discussion point within the company that I have to give away some titles," he acknowledges. More important, Neil vows that he will never again veer from the licensing-only business model that has enthralled him his entire business career. David Conn, an executive vice-president who is a leading internal candidate for promotion to Cole's president or chief operating officer, says that his boss has learned from his mistakes. "I can't imagine him wanting to alter what is his dream business model," says Conn, a marketing executive who first worked for Candie's from 1995 to 2000 and returned in 2004. "And I can't imagine that the board would let him."  By Anthony Bianco
BW MALL
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