Forget moderate vendor Kellwood Co. Welcome to the new Kellwood, brand manager.
The $1.96 billion vendor is out to recast itself over the next five years and said Tuesday that branded better-price-and-above business soon should equal its traditional nonbranded moderate offerings. The St. Louis-based company also took a major stride in its strategic plan Tuesday by selling its dress shirts manufacturing division Smart Shirts.
"Whereas Kellwood was once seen as the maker of moderate apparel and a manufacturer because we own Smart Shirts, the future of Kellwood is to be a brand-focused marketing enterprise," Robert C. Skinner Jr., chairman, president and chief executive officer of Kellwood, told WWD. "Smart Shirts was the only part of the operation where we were a manufacturer, as opposed to a brand manager. We felt our cash was better invested in brands than mills."
Smart Shirts, which has about $450 million in annual sales, was sold for $161 million, which includes selling manufacturing assets for $120 million to Youngor Group Co. Ltd. and the related real estate assets in Hong Kong for $41 million to Bright Treasure Development Ltd. Kellwood plans to use the proceeds to reduce debt and repurchase shares with the cash.
Kellwood had planned to invest more than $70 million in the next four years — more than 40 percent of the firm's total capital plan — into Smart Shirts, which produced shirts in a licensed and private label capacity for men's and some women's. With the changing market, including competition from vertically integrated manufacturers, Smart Shirts lost its competitive advantage, Skinner said.
Skinner said no other division or brand stuck out as inconsistent with the company's model like Smart Shirts, but he did say he will reconsider the portfolio with time and that divestiture is one means to correct the portfolio.
Like Jones Apparel Group and Liz Claiborne Inc. did on their third-quarter earnings calls last week, Kellwood used slides for the first time to accompany its investor conference call Tuesday. "This is a way to be more transparent to our shareholders," Skinner told WWD. "Shareholders always want more transparency, and I think companies, including Kellwood, are providing more information than in the past, to make sure that our story is understood in the best possible way."The company spelled out where it hopes to see additional revenues and cost savings between now and 2012:
l Organic sales growth of 4 to 5 percent annually by expanding the four brands it acquired in the last year — Hollywould, Vince, Hanna Andersson and Royal Robbins — and other higher-margin brands including XOXO, the licensed Calvin Klein white label and Democracy, which it relaunched for spring 2007. Details include retail expansion with a few additional Hollywould stores, tester Vince doors, and 60 new stores for Hanna Andersson, a children's wear brand acquired in July, to total 78 stores by 2012.
l Operating margins of 9 percent for existing businesses, as the firm reduced costs through previously announced: 1) reorganization of the women's sportswear business; 2) transformation of Phat Farm men's into solely a licensing model and reporting Phat Fashions in the company's women's sportswear segment; 3) a reduction of costs by streamlining corporate functions to save $4 million in 2007 and $7.5 million in each year after, and 4) the implementation of supply chain changes of about $45 million in savings by 2012. Kellwood also hopes the greater percentage of sales in better- and above-priced brands will generate higher margins, as well as a 30 percent increase in marketing spending.
l Earnings per share growth of at least 25 percent, after an even more significant 2008 increase to $1.50 in earnings per diluted share, compared with 71 cents in 2007. This takes into account the predicted organic sales growth and operating margins, as well as reduction of debt and share repurchases, including those following the Smart Shirts sale.
At the conclusion of the five-year strategic plan in 2012, Kellwood hopes to be:
- Equally balanced between its traditional mainstream brands and better- and above-priced brands, as compared with moderate business making up 70 percent of sales today.
- Owned brands contributing to 70 percent of sales, from half today.
- Private brands dropping to only 10 percent of business, from 28 percent today.
- Direct-to-consumer retail sales contributing 15 to 20 percent, up from 8 percent today.
"We're never satisfied, and the changes will always continue," Skinner told WWD. "Good companies always change because the marketplace continues to change. To set a correct strategy, you have to be aware of your internal capabilities and the eternal environment."With retailers reporting tough comps in recent months that caused competitors like Claiborne to report third-quarter earnings drops of 65 percent, the environment is challenging and investor pressure is high.
Kellwood is facing particular pressure to prove to shareholders it can turn around its operations fast, after turning down Sun Capital's $21-a-share bid three weeks ago — a topic on which Kellwood's management did not take questions on the call Tuesday. Skinner said the timing of the call connected to the sale of Smart Shirts, rather than pressures from the investing community after Kellwood passed on Sun Capital's $543 million bid.
A report from UBS called Kellwood's selling of Smart Shirts "an easy decision to raise profitability, although it eliminated an earnings contribution."
Brad Stephens, an analyst for Morgan Keegan & Co. Inc., agreed selling Smart Shirts was a good decision. "It was too difficult to compete in Asian manufacturing from St. Louis," Stephens said. "This got them out, which gives them a shot — price doesn't matter."
"When there's low levels of confidence, you need to give more clarity if you think you've got a story to tell," Stephens said, adding he thinks pressures in light of the Sun Capital bid influenced the timing of the call.
Without Smart Shirts and with the cost-saving initiatives, the company revised its 2008 outlook. Its sales prediction of $1.55 billion held steady, but its earnings almost doubled to $32 million, or $1.50 a diluted share, from previous forecasts of $17 million to $20 million, or 66 to 67 cents.
"We believe it's fair to say all of these assumptions...are optimistic, an apparent reaction to the recent bid by Sun Capital, with very little evidence the new business structure and merchandising issues are yet making a positive impact," said analyst Jeffrey Edelman in a UBS report released Tuesday.
Stephens of Morgan Keegan questioned whether the decline in sales of the legacy brands can be held at only $15 million. He pointed to both Kellwood's track record for execution and to the general retail climate.
"If they execute on all of what they have laid out, the stock price could double in the next few years, but for the stock to be basically flat today, there's clearly not a lot of faith here," Stephens said. "In the wholesale universe, we've heard it all before — and that's the markets lack of reaction today."Kellwood's stock closed up 26 cents Tuesday at $15.48.
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