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Wall St. Sees Rebound Ahead for Sportswear

NEW YORK -- Women's sportswear had its share of troubles last year, but according to Wall Street, the worst may be over.<BR><BR>Analysts are predicting a modest recovery this year, thanks to cost controls, leaner inventories and stronger fashion...

NEW YORK — Women’s sportswear had its share of troubles last year, but according to Wall Street, the worst may be over.

Analysts are predicting a modest recovery this year, thanks to cost controls, leaner inventories and stronger fashion direction.

Last year’s financial results for apparel manufacturers show women’s sportswear — along with fleecewear and T-shirts — was a troubled business.

Some sportswear makers — notably Jones Apparel Group and St. John Knits, among a handlful of others — pulled solidly ahead, but the sagging performance at Liz Claiborne Inc. was a dim bellwether for the category.

Overall, a compilation of 26 women’s and men’s apparel companies showed a healthy gain of 44.2 percent in profits on a 5.7 percent gain in sales for 1993. But the results were skewed by turnaround situations, a number of major special charges, and exceptionally large gains among men’s wear companies, buoyed in some cases by the strong acceptance of wrinkle-free cotton pants.

The year ended on a bumpier note, though, with an 11.7 percent drop in fourth-quarter profits on a 3.7 percent sales gain.

Two companies absent from the 1993 compilation are the Gitano Group and Crystal Brands, whose deep financial problems would have further distorted total figures had they been included. Crystal Brands filed a Chapter 11 petition here on Jan. 21, and Gitano put itself on the block, struck a deal last month with Fruit of the Loom and entered Chapter 11 to push the sale through.

For the current year, apparel sales got off to a slow start, hampered by severe weather and the Los Angeles earthquake, but analysts say recovery should be visible by the second half. Todd D. Slater of UBS Securities forecast “growth in career areas because casual clothing is crowded.”

“The consumer will buy things she needs unless there is something exciting to generate her interest,” Slater said.

“Nobody can really put their finger on the malaise of women’s sportswear,” said Laurence C. Leeds Jr., a managing director at Buckingham Research.

Leeds, the former head of Manhattan Industries, added: “Some say it is a fashion inadequacy, but no one seems to have any brilliant ideas on how to rectify the situation.” Although Leeds doesn’t predict any “macro trends” this year, he noted that last year’s winners — including Jones Apparel Group and Kellwood Co. — should continue to gain market share, while Liz Claiborne is expected to continue trying to deal with a sluggish sportswear market.

Struggling throughout 1993, Claiborne reported that earnings dropped 71.3 percent for the fourth quarter and 42 percent for the year. Attacking its problems, the company plans to shorten its production cycle by 25 percent, clarify its sportswear lines and improve margins, but has stated it expects the difficult market to continue at least through the first half of 1994.

Analysts, too, are hopeful about a turnaround but do not expect it until the second half.

Jay Meltzer of Goldman Sachs projects $1.60 a share for Claiborne in 1994, against $1.54, with strength in the second half.

Slater projects $1.65 for Claiborne next year. He singled out the Dana Buchman bridge line for its focus on delivering high quality product at a value price compared to other bridge lines.

He said he hopes the whole company can strengthen, because “when Liz is weak, it hurts the rest of the industry” and means less open-to-buy for women’s sportswear.

“The first half will be tough for Claiborne because of excess inventory at retail,” Slater said. “But when the product gets exciting again, I think it will turn around.” Buckingham’s Leeds also expects a turnaround at Liz Claiborne, helped by production cuts and fewer markdowns. He noted that the non-women’s apparel businesses are doing well.

Bernard Chaus, a maker of moderate-price sportswear, continued its downward slide in the 1993, losing $23.7 million for the year. Analysts withheld forecasts about the company.

In sharp contrast, Jones Apparel posted a 16 percent earnings increase in the quarter and a 20 percent gain for the year.

“Jones has divisionalized aggressively,” said Brenda J. Gall of Merrill Lynch. “They have an emphasis on product that gives the consumer a reason to buy, and that’s the key in this market.” Gall projects earnings of $2.10 to $2.15 “conservatively” this year, against $1.85 in 1993.

Richard S. Lawrence, an analyst at Janney Montgomery Scott, expects Jones to earn $2.10 to $2.12 for 1994.

“The company is especially well positioned to gain market share this year,” Lawrence noted.”It will be a great challenge for Liz Claiborne to maintain market share against smaller competitors who are pecking away.” While he expects continued growth of the core Jones lines, Lawrence noted “the jury is still out about Rena Rowan for Saville Sport and Evan- Picone career sportswear.” Jones acquired the Evan-Picone trademarks last year from Crystal Brands.

“Jones’s capital structure is rock solid, with plenty of equity and tight inventory,” Lawrence added. “We can expect management to drive home as hard as they can to take advantage of opportunities to gain market share this year.”

Goldman’s Meltzer said: “Jones should continue to perform well and pick up market share.” Meltzer believes the company will earn $2.15 a share this year.

Another winner was St. John Knits, which posted a 32.6 percent profit gain for the year, including a 9.5 percent rise in the final quarter. The company sells about 55 percent of its merchandise to three upscale retailers: Saks Fifth Avenue, Neiman Marcus and Nordstrom.

“St. John succeeds because it is focused on its customer,” Slater of BDS noted. “It knows who she is and sticks with her, staying within its niche and expertise.”

Warnaco Group, with it dual businesses in men’s wear and women’s intimate apparel, reported results from continuing operations for the year rose 39.4 percent, and analysts expect continued vigor this year, although restructuring costs for men’s wear operations cut into the final quarter.

“Linda Wachner [Warnaco chief executive officer] is doing an excellent job,” Leeds said, forecasting that 1994 “will be a good year for both Warnaco and Authentic Fitness.” Authentic Fitness, a swimwear and athletic apparel manufacturer, is another public company that Wachner heads.

Slater of UBS said margins are improving at Warnaco, and he projects operating earnings growth of 18 percent in 1994, and 20 to 25 percent in 1995, fueled by licensed Fruit of the Loom bras for the mass market, Calvin Klein underwear licenses and a distribution venture with Avon.

Lawrence expects Kellwood Co.’s “above average” sales and earnings growth to continue in the current fiscal year, which ends in April, and into next year. The diversified soft goods manufacturer has built a strong presence in moderate-price women’s sportswear.

“Growth is dependent on acquisitions, and whether they are completed early enough to have an impact on the full year,” he said. For the year ending in April, Lawrence projects earnings gains of 26 percent to $2.55, and sales increases of 14 percent. He expects 11 percent revenue gains in fiscal 1995 and 23 percent earnings gains, to $3.15 for the year. Meltzer said Kellwood is “still in a growth mode,” and he is looking for $2.53 for 1994 and $2.80 for 1995. Analysts agreed it was a particularly tough year for T-shirt and fleece producers, and say despite production cuts, inventory problems remain at some manufacturers.

“The good news is that retailers have been working down their inventories, but the bad news is excess capacity and inventories remain at manufacturers,” according to Goldman’s Meltzer.

Before the plans to acquire Gitano were announced, Meltzer was looking for FTL to have a flat year at $2.25 per share, “reflecting continued overcapacity problems in T-shirts and fleece.” He said the same situation applies to Russell and Tultex. For Russell, Meltzer is projecting $1.80 per share against $1.75 operating profits.

Tultex, which reported 16 cents a share for the year, came in “way below normalized earnings” and “should be able to show some moderate recovery in 1994,” with per-share earnings of 25 cents.

VF Corp. also suffered from overcapacity in fleece, which contributed to a decline in its fourth-quarter earnings to 94 cents from $1.18 in the comparable quarter. Fleecewear and T-shirts are not the bulk of its business, however, and analysts are expecting the company to have a successful 1994. Meltzer expects $4 for 1995, against $3.71. “The company has done a good job facing up to its fleece and T-shirt problems. It has rationalized its capacity and also made value-added acquisitions,” Meltzer said. In 1993, VF picked up Nutmeg Industries and H.H. Cutler. Lawrence expects $4.15 a share for 1995, noting the company had a strong jeanswear performance in 1993 despite problems at its Girbaud and Bassett-Walker divisions. Commenting on the overall domestic jeans picture, Lawrence said he expects growth in “very low single digits” and said VF can increase its market share 2 to 3 percent.

“Internationally is where the jeans story is,” Lawrence said, adding that VF is in position to succeed abroad.

“VF is a good manufacturing and distribution company,” he said. “It can build market share in Europe.”

Lawrence sees 20 percent revenue growth in Europe in 1994.

Edward F. Johnson of Johnson Redbook Service said women’s apparel sales so far have been “crowded by home products and autos” but this trend shows signs of easing.

“Women are getting threadbare,” Johnson said. “Sales should rebound 6 to 7 percent for the year, with strength in the second half.” According to Meltzer, women’s apparel sales may pick up from the “softer and better-tailored looks and moderately shorter skirts” offered for spring. While he is hoping for women’s apparel to recover, he said, “Plain, safe basic products are not going to solve the industry’s problems.” UBS’s Slater concluded, “In general, 1994 will be a good year for apparel manufacturers who have a clearly differentiated product, a unique product.”