Poised to Grow, Kellwood Eyes Deals

Kellwood CEO Michael W. Kramer wants to acquire at least one brand, and discusses European plans for Vince and a new venue for Kimora Lee Simmons.

After a stormy 2009 of its own, Kellwood Co. is looking forward to 2010 and hoping to ink a deal for at least one acquisition to add to its portfolio of brands.

This story first appeared in the December 2, 2009 issue of WWD.  Subscribe Today.

The company in recent weeks has been working with two investment banks to identify possible acquisition targets. There are two offers on the table and two letters of intent signed, according to Michael W. Kramer, Kellwood’s president and chief executive officer.

While he declined to provide details about the targeted brands, Kramer is hoping at least one deal could materialize within the next two months. The firm remains on the prowl for even more acquisitions throughout next year and beyond.

Why now — given talk on the street that the holiday selling season will be just OK, jobs are still being lost and the overall economic backdrop might be headed for that dreaded second leg down of a W-shaped recovery?

“I see undervaluation going on right now, and a lot of great brands out there that have been running paycheck to paycheck. The economy has hit these firms hard, and they are forced to come to the table due to the liquidity crunch. They don’t have cash for next season’s orders,” Kramer explained.

So what are the ideal criteria for firms to catch his eye?

“The holy grail for me [is] great brands that are run badly from an operating perspective. In the past, great sales hid all wounds. After the economy [hit the skids], all those wounds and bad operating practices have come to light. We are seeing distressed brands, some of which are still great. That wasn’t the case two years ago,” Kramer said.

For Kramer, a little distress is a good thing because of the potential for more upside once the operating structure can be leveraged off Kellwood’s infrastructure. All back-office operations are primarily in Los Angeles these days, part of a restructuring that began 18 months ago and shaved off $150 million in expense costs.

What Kramer thinks is perfect for Kellwood are brands, such as those in the juniors and women’s sportswear categories, that are strategically competitive and can help the apparel firm capture a greater foothold in market share.

He calls the ideal acquisitions “plug and play.” It’s an acquisition model not unlike the firm’s purchase of contemporary brand Vince in October 2006, giving Kellwood accretion to its bottom line in a relatively short amount of time after the purchase closed.

Kramer said Kellwood can easily self-finance the smaller deals, although larger ones would be funded with Sun Capital Partners, which acquired the apparel manufacturer in February 2008 for $762 million.

Five months after the Sun acquisition, Kramer was named ceo. His first task was to rework the firm’s infrastructure. Each brand previously operated autonomously, but under Kramer’s leadership, those back-office operations have been consolidated into one support group. In addition, Kellwood used to work with Li & Fung for sourcing, but that’s now done in-house, with the team working with longtime supply vendors to improve raw product pricing and labor costs.

“We’re now significantly faster to market than we’ve ever been. Across the board, we’ve cut our lead time to market by at least 25 percent,” the ceo said, boasting the changes have Kellwood “sitting very well from a profitability perspective.”

Declining to provide specifics on just how well the firm — once public and now private — is doing, Kramer did note Kellwood has increased earnings before interest, taxes, depreciation and amortization year-over-year by $55 million, and is now posting positive EBITDA. That’s in contrast to negative EBITDA when Sun bought the company.

“We’re generating positive cash flow at rates this company’s never seen in the last eight years. Now that the bond issue is behind us, we’re working with Sun Capital on acquisitions,” Kramer said.

The bond issue refers to weeks of intense negotiations with bondholders that resulted in a $140 million exchange offer for new senior secured notes now due in 2014. There was concern in July that, had the parties not reached an agreement, a bankruptcy filing might have been necessary for the apparel firm.

Executives at Sun Capital could not be reached for comment.

Kellwood has brands in three distribution categories — premium, midtier and value. The premium brands, including Vince and David Meister, are doing well, while the midtier brands, such as XOXO, Baby Phat, Sag Harbor and Briggs, have been hit the worst by the pullback in consumer spending. The value brands, essentially private label lines such as White Stag and George produced under license for retailers such as Wal-Mart and Kohl’s, are doing OK, Kramer said.

“Vince is going to post higher sales [this year] versus last year,” the ceo said. He added competitors have seen increased volume driven by accessories sales — a category Vince isn’t in — meaning the sales increases are all due to its apparel offerings. Kramer is planning an international expansion of Vince targeting a freestanding store opening in the U.K. either late next year or in early 2011.

Sales at David Meister for this year will be comparable to 2008 sales. The brand launched a higher price line exclusively at Bergdorf Goodman in August, which Kramer says is selling well.

“The premium brands are really subcouture brands. They are doing well because someone who normally bought a $4,000 couture gown is trading down a bit, buying instead a $1,500 David Meister gown,” Kramer said.

He’s not surprised the midtier brands are where consumers have pulled back the most, many by aspirational shoppers.

“A woman who buys couture and subcouture buy because of quality of the design and the brand. They’re not going to buy Sag Harbor when they are used to buying Vince,” Kramer explained.

The pullback on inventory levels this holiday season will help with margins, and should help lessen the usual post-holiday retail demand for chargebacks, Kramer predicted. He also speculated higher margins plus depleted inventory levels should mean a rather bullish outlook for spring orders.

In addition, the ceo said, Kimora Lee Simmons is launching a new line in the spring, neither streetwear nor urban related, that will be sold exclusively at Macy’s. A name for the brand is expected to be determined shortly.

A spokesman for Macy’s could not be reached for comment.

Meanwhile, Kellwood’s junior sportswear label XOXO is undergoing an image change. The new ultrasexy image was introduced last week to the streets of New York via a pair of rented storefront windows on the corner of 38th Street and Fifth Avenue. The new windows, on display until Dec. 6, showcase what looks like a girl’s bedroom, where models play the roles of the girl who lives there and a friend. (A male friend stops by occasionally, as well.)

The afternoon show highlights the girls getting ready for their day — brushing and styling hair, applying makeup, painting nails and trying on clothes. The evening show is based on the girls getting ready to go out. They try on eveningwear (often showing off their XOXO lingerie) and prepare for a night on the town.

Following the window extravaganza, XOXO plans to launch a new, sexier ad campaign to go with its new image.