By and  on June 29, 2009

What next for Hartmarx Corp.?

Now that a Chicago bankruptcy court has signed a final order approving the sale of the assets of bankrupt Hartmarx Corp. to London-based Emerisque Brands and its investment partner SKNL North America, the question among retailers, bankers and even politicians — including its best-known customer, President Obama — remains whether the new owners can make Hartmarx and its brands viable in the long term and fulfill their promise to maintain jobs in the U.S.

A spokeswoman for Emerisque said, “The bankruptcy court acknowledged that the company has adequate financing to close the deal. Emerisque also is accelerating its business analysis of the Hartmarx operation so it can hit the ground running once the deal closes. We are looking at all opportunities to reconstitute the Hartmarx business to return it to growth and profitability.”

She added, “We are committed to U.S. production for Hart Schaffner Marx and Hickey Freeman tailored clothing.”

The purchase is expected to close July 7.

The issue of the company’s manufacturing became a lightning rod during the bankruptcy proceedings as union leaders and elected officials publicly lobbied for a buyer that would preserve Hartmarx’s 3,000 manufacturing jobs even as financial sources said the banking group led by Well Fargo was pushing for a liquidation of the 125-year-old firm.

Emerisque ultimately sweetened its offer as the liquidation storm swirled, but not before union workers and Congressional officials expressed umbrage at Wells Fargo’s stance, pointing out the bank itself was bailed out by the government’s Troubled Assets Relief Program.

Emerisque was cheered by unions for its stated intention to keep Hartmarx’s domestic factories and its bid to buy the entire company, rather than seeking only pieces of it like rival bidders. But operational experts said reducing overhead through outsourcing should be considered as part of any turnaround plan, especially for midtier-priced products, which Hartmarx has continued to make domestically even as most competitors shifted manufacturing overseas.

One source close to Emerisque said many Hartmarx brands — including Monarchy and Exclusively Misook — have untapped potential in their core U.S. market, as well as growth potential in expanding distribution overseas, as do the flagship men’s brand Hart Schaffner Marx and Hickey Freeman. If and when the men’s brands are distributed overseas, production would remain primarily in the U.S. since many overseas markets place a premium on tailored apparel that has the “Made in America” tag line, the source contended. In contrast, Monarchy and Exclusively Misook, as well as Christopher Blue, are already produced overseas.

Not surprisingly, Hartmarx chief executive officer Homi Patel hailed Emerisque’s purchase of the company. “It’s been a trying time for the company, but I’m pleased with the court’s decision,” he said Friday. “This is excellent news for our 3,000 workers.”

Patel’s future is among the areas of uncertainty to be addressed in the next phase of Hartmarx’s reorganization. Many private equity firms keep existing management in place when they buy nondistressed assets, but that’s not necessarily the case when assets of bankrupt firms are acquired.

Sources close to Emerisque said the question of management hasn’t been addressed and won’t be until after the expected close of the transaction early next month. The highest priority, they say, will be the structure of the business going forward, followed by an analysis of the skills needed to steer the operation and an evaluation of the current team. Only after that process will the private equity firm provide qualified individuals the opportunity to fill the appropriate open positions, said one source.

Emerisque now must develop a strategy on how to manage Hartmarx’s brand portfolio, one that contains some struggling businesses in disparate markets and each with its own set of operational issues.

Beyond these operational challenges, there’s also the question of Hartmarx’s core men’s suit business. Even before the company’s credit issues, Hartmarx had struggled with its reliance on a relatively stagnant tailored clothing market — one that continues to be disproportionately hit by the recession even as retailers struggle with the worst business conditions in decades. In 2008, Hartmarx jettisoned a number of midtier licenses in an attempt to diversify. But even when the company filed for bankruptcy in January it was still seeking to find a niche in a market dominated by sportswear, vertical retailers and megabrands. Observers said Emerisque will have to face that reality head on and accelerate Hartmarx’s transition to a brand manager from a production-driven company whose focus mainly was on keeping its unionized factories busy — thus resulting in substantial overproduction for years.

In addition to Hart Schaffner Marx and Hickey Freeman in men’s tailored clothing, Monarchy in men’s sportswear, Misook in women’s knitwear and denim specialist Christopher Blue, Emerisque would inherit a number of licensed brands as well as the upscale Bobby Jones name in golf. It would also get the women’s career line Barrie Pace, as well as men’s and women’s tailored brand Austin Reed.

Women’s knitwear supplier Zooey is now defunct, and Hartmarx’s long-term licensing agreement with British men’s label Ted Baker was voided two weeks ago by the bankruptcy court after an eight-year relationship. The brand, which grossed around $35 million in annual volume, was never profitable in the U.S., according to market sources familiar with the business.

Although visible during the long drawn-out battle for Hartmarx, Emerisque is hardly a household name in the private equity field. Cofounded in 2004 by Ajay Khaitan, chief executive officer, Emerisque doesn’t manage a blind pool of money, and instead raises funding for its deals on a transaction-by-transaction basis from institutional investors and the private investment funds of families connected with Emerisque’s officers, according to one individual familiar with the operation.

There were rumblings — denied by Emerisque — before the start of the Hartmarx auction that the private equity company might lack the funding necessary to move forward. The purchase price of $119 million, including $33.5 million in the assumption of liabilities, is below the $128.4 million agreed upon in the stalking horse bid because of adjustments in asset valuations.

Emerisque’s overall game plan is to acquire heritage brands that have been around for 30 to 40 years or longer and have critical mass, but are financially underperforming. As Emerisque sees it, the two key ingredients for the revival of brands are authenticity and the ability to fine-tune sales in the core market, as well as expand overseas in China, Russia, India and the Middle East.

How easily it can do that with the Hartmarx stable of brands remains to be seen — and the deal is by far the largest Emerisque has ever done. To date, its sole acquisition was less than half the size of the one being contemplated. With Sun Capital Partners Inc. and The 180 Group, Emerisque acquired British denim brand Lee Cooper in 2005 for 30.5 million pounds, or $55.5 million at average exchange. Emerisque also taps experts in different countries for assistance when needed.

According to a source familiar with the turnaround of the 100-year-old Lee Cooper brand, the firm’s efforts on the label’s behalf focused on its connections to an authentic English lifestyle. Gross margins, which had declined 13 percent over a seven-year period prior to the purchase, increased 11 percent during the time Emerisque coowned the brand, the source said. But Lee Cooper never gained traction in the U.S. market — it was launched here in 2006 but is no longer distributed in America. Meanwhile, the brand has been successful in France and in developing markets like India.

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