NEW YORK— A deal between giant Liz Claiborne Inc. and Ellen Tracy could come any day now.
While any agreement could be derailed by last-minute hiccups, sources said that Claiborne, the $3.4 billion diversified apparel firm, is already restructuring in anticipation of completing the acquisition of Ellen Tracy, the $250 million bridge sportswear company. Reports that Claiborne was negotiating with Ellen Tracy appeared in WWD last month.
Neither Paul Charron, chairman and chief executive officer of Claiborne, nor Herbert Gallen, chairman and ceo of Ellen Tracy, would comment. But in a conference call last month, Charron said, "The current environment presents us with a number of attractive opportunities to evaluate," while actual acquisitions would need to be "consistent with our multibrand, multichannel diversification strategy."
Claiborne already is a sizable player in the bridge arena through its Dana Buchman division. The acquisition of Ellen Tracy would add another world-class label to its stable, solidify its position in the bridge sportswear market and strengthen its clout with department stores.
For Ellen Tracy, the privately held company founded by the 86-year-old Gallen, selling to Claiborne would ensure that the company would outlive him and allow him to plan his estate. It also provides the financial support for Ellen Tracy to expand internationally — the company sells some small accounts in Latin America — open freestanding stores and diversify into more products. Currently, Ellen Tracy has licensing agreements for footwear, eyewear, hosiery, leather outerwear, belts, scarves and fragrances.
"I think it’ll be a win-win situation for everyone," said Arnold Aronson, managing director, retail strategies at Kurt Salmon Associates.
"It will give Herb Gallen a way to ensure that the company continues in very good hands. Liz Claiborne is an industry leader. It also gives Linda Allard [Tracy’s design director], who’s put her life into that company, a terrific platform and a solid financial base," said Aronson.
One of the key advantages to such a deal is similar distribution channels. "Claiborne has a terrific supply chain and all the resources a company like Ellen Tracy can utilize," said Aronson. "Ellen Tracy’s reliance on the department store channel would be compatible with Liz Claiborne’s channels. They’re both calling on the same customers, and they talk to the same general merchandise managers. I think one and one would add up to two, or even more."Aronson pointed out that an Ellen Tracy purchase would increase Claiborne’s critical mass in the bridge category and is completely in line with what the group has built in terms of good, better, best. "They’ve now built a stable of brands that basically encompass all the major price zones in American department stores," he said.
Claiborne boasts 26 brands under its international and domestic umbrella, most of which have been acquired or created under Charron’s eight-year reign. Over the past few years, Claiborne has gone on a buying spree, and its brands currently run the gamut from its namesake signature label to Sigrid Olsen, Laundry by Shelli Segal, Lucky Brand Dungarees, several DKNY divisions, the Kenneth Cole apparel license and the European apparel and accessories company Mexx Group BV.
Claiborne has also developed its special markets division, which now sells to such discount and moderate retailers as Wal-Mart Stores, J.C. Penney Co., Kohl’s and Mervyn’s. The division, which includes lines such as Villager and Crazy Horse, generates roughly $400 million in sales a year, or 11 percent of Claiborne’s annual sales.
As a result, Claiborne’s products now range from mass market, moderate and better-price sportswear to contemporary dresses, jeans and status labels, including some freestanding stores. At the close of 2001, the firm operated 423 stores: 206 specialty stores under six different nameplates, including 71 Mexx stores in Europe, and 217 outlets.
Andrew Jassin, managing director of the Jassin O’Rourke Group, believes that Claiborne could use its financial, logistical and marketing muscle to expand Ellen Tracy through both licensing and freestanding stores.
"Ellen Tracy is a private company and the mainstay of the bridge business. In order for it to grow, it needs additional financing and additional management. I think the Claiborne team would provide good support management from licensing to complete infrastructure. Not that Ellen Tracy doesn’t have that now. But they can open freestanding Ellen Tracy stores," said Jassin.
"From Claiborne’s point of view, Ellen Tracy is still a world-class brand, and it’s a feather in Claiborne’s cap. Ellen Tracy still has room to grow and can expand into other opportunistic areas," he said. "It’s very difficult for a company like Claiborne to grow organically. Sometimes, you have to make acquisitions, and this would be a wonderful trophy brand."Asked how much Claiborne would have to pay for Ellen Tracy, Jassin said, "This would qualify to sell for a premium multiple. It not only is a mainstay trademark in all stores, but there’s incredible value to all the intellectual property, which adds to the trademark."
Jennifer Black, equity analyst at Wells Fargo Securities, said, "The multiples that companies such as Claiborne and Jones Apparel Group have paid for some of their acquisitions have been all over the place. It varies depending on the name of the brand, the business and the time period in which the deal is made. In the current environment, a company will prefer to pay less than half of total sales if it can, but not more than one-times sales. The average is probably between half to one-times sales."
For example, earlier this year, Jones Apparel Group paid $385 million for RSV Sport Inc., which makes LEI Jeans. Last year, LEI generated wholesale volume of $248 million and generated an additional $100 million in sales of licensed products.
Claiborne’s acquisitive nature in the last several years has been similar to that of its chief competitor, Jones, the $4.1 billion firm, which in recent years has also purchased Sun Apparel, the McNaughton Apparel Group, Nine West and Gloria Vanderbilt Apparel Corp. Some experts believe not many other apparel companies could successfully acquire Ellen Tracy.
"I think it’s a great move for both companies," said Allan Ellinger, senior managing director of Marketing Management Group. "It’s a great brand, and very few companies in our industry today could make that acquisition and do it right. Jones could have been one of them. In an era of a brand shortage, Ellen Tracy is a great brand. It’s a privately held business, and it’s made a lot of money over the years. He [Gallen] is not getting any younger. He’s a man who likes to be in control. He can control this transaction because he’s still around to do it. Claiborne would offer Linda [Allard] an employment contract. When privately held companies are sold, the principals stay on for a time."
Asked if Ellen Tracy could survive without Allard, Ellinger said, "Companies become institutionalized. Ellen Tracy is bigger than Linda Allard. As long as there is a team in place that can maintain the company’s point of view."Given Claiborne’s track record, it appears the company doesn’t stifle its designers and gives them creative freedom. Sigrid Olsen, which was Claiborne’s first acquisition in February 1999, has flourished under Claiborne’s auspices. Olsen, who hadn’t heard about Claiborne negotiating for Ellen Tracy, told WWD Tuesday that Claiborne has given her creative freedom and access to its corporate merchandising department, which subscribes to all the color and design services.
"He [Charron] has taken the time to meet with me one-to-one. This was my baby, and he understands that. He understands how you have your heart tied up with that if it was your own company. Paul takes the time just to chat and see what my thoughts are," said Olsen, who is based outside Boston.
"I feel I’ve been very well respected," she added. One drawback is there are a lot more steps one must take before a decision is made, "but they’re quite efficient and responsive to my desire to keep the aesthetic and culture of my company, which is quite different because it’s so entrepreneurial and design driven."
"You have to make the creativity match up with the balance sheet and we’re doing really well, so I guess it’s working," said Olsen.
Ellinger pointed out that when a company like Claiborne acquires a business like Ellen Tracy, what’s important is keeping the front end of the business in place, such as design, merchandising, sales and marketing.
"Accounting, distribution and production is integrated into the acquirer, and it allows more of the company’s gross profits to drop to the acquirer’s bottom line. What that does is allow a public company that’s paying a multiple to actually pay itself back quickly. They get a return on investment quicker."
Still, one question on industry observers’ minds is whether Gallen will actually go through with selling his company. In 1996, Gallen terminated a deal to sell the firm to Boston-based Bain Capital Inc. As sources pointed out, so much of Gallen’s identity is tied to Ellen Tracy, and some observers believe he may be reluctant to let go. Furthermore, sources believe he still has a lot of energy, and they don’t think he’s ready to spend the rest of his days sailing on his 164-foot yacht, the "Mystique." In March 2000, Gallen married Allard, who is totally involved in the business, and he has reportedly been transferring some of the company’s control to her.Although sources believe Gallen may be planning his retirement from the industry, an Ellen Tracy spokeswoman said, "Nothing has been said about Mr. Gallen retiring."
Gallen is considered a hands-on executive who, sources said, even prices the line himself. What stores have always appreciated about Gallen is he never tells them what to buy. "He’s a real old merchant, and if they buy it, they buy it. He never forces it down your throats. He has very good relationships with all his customers," said a source.
As a major department store player, Ellen Tracy was one of the first manufacturers to give markdown money to stores if things didn’t sell. In recent years, Gallen got tougher and became a proponent of larger sell-throughs and target numbers, instituting marketing programs to encourage full-price selling.
Kurt Salmon’s Aronson believes Gallen may finally be ready to make sure his company lands in good hands.
"You want to be sure your children are well placed. He wants a good placement for what has been his life achievement in building one of the finest apparel brand names in the world," said Aronson.
Ellen Tracy, founded by Gallen in 1949 as a blouse manufacturer, evolved with its customer from a junior line to contemporary and now bridge. It is one of the healthiest brands in the bridge area. The firm has two lines: Linda Allard Ellen Tracy and Company Ellen Tracy, a more casual counterpart. It also has petite and large-size divisions. It sells such stores as Saks Fifth Avenue, Bloomingdale’s, Nordstrom, Lord & Taylor, Macy’s Herald Square, Neiman Marcus, Marshall Field’s and Dillard’s. The company is reportedly spending about $4 million this fall on an image campaign for Linda Allard Ellen Tracy and Company Ellen Tracy featuring Cindy Crawford, as reported.
Gallen’s programs on full-price selling fit in well with Charron’s philosophy at Claiborne, where he has focused on flow of goods, end-of-the-month inventories and getting more sales out of less inventory.
Claiborne, with its record of consistent earnings and sales growth, is a darling of Wall Street.
For the three months ended June 29, net income was $38.8 million, or 36 cents a diluted share, from $32.5 million, or 31 cents, in the year-ago quarter. Sales also gained 8.6 percent to $789.5 million from $727 million, the 26th consecutive quarter of sales growth for the firm. Improved execution and its recent Mexx Canada acquisition lifted Liz’s second-quarter results.According to financial analysts, Claiborne is one of the few apparel giants that can still acquire more firms and be in a position to adequately absorb the new operation and expand it.
Not wanting to guess at which "targets" Liz might covet, they said that, in general, the company has shown time and time again that its diversification strategy is right on the mark.
Black of Wells Fargo Securities wrote in a recent research note that Claiborneis well positioned to continue to post positive sales and earnings gains well into fiscal 2003.
"We also suspect that the current environment of attractive valuations, coupled with [Claiborne’s] hefty cash position, will entice [the company] to make additional accretive acquisitions in the near term," she wrote.
Reached by phone, Black said that a Claiborne acquisition of Ellen Tracy would be an "absolute plus" for the apparel giant. "I think of Ellen Tracy as timeless and a great bridge resource for Claiborne."
Jeffrey Edelman, apparel analyst at UBS Warburg, estimates that the company’s cash position, excluding acquisitions and stock repurchases, could easily approach $500 million by the end of 2003, compared with debt of around $300 million. Edelman noted that any acquisition by Claiborne would likely be welcomed by retailers. "They are looking to manage their inventory better, looking for vendors that can supply fashion with a shorter cycle time. The shorter cycle seems to be the requirement for servicing major retail customers."
The current economic environment, he said, could have many companies with their founding family members still involved in operations contemplating a sale of the company or ways to get a cash infusion for growth. Either possibility, he said, could provide firms such as Claiborne with "opportunistic buys."
Edelman observed that Claiborne, for the most part, has been able to provide benefits to the companies that it acquires, giving the brands expansion and momentum in the market place.
Dennis Rosenberg, equity analyst at Credit Suisse First Boston, said, "Liz’s growth strategy over the past three years has been to acquire companies that supplement what they do."
He observed that with Mexx fully assimilated, Claiborne is in a position to focus on more than just one acquisition. He expects that future acquisitions would be small- and medium-sized firms, which are easier to integrate within the company’s overall operations.Top candidates would be companies that are accretive to earnings within the first full year of operations, Rosenberg said. The analyst noted that Claiborne historically has a tendency to keep the existing management team in place.
"Liz is one of the better-managed companies, demonstrated by its consistent earnings record dating back to the mid-1990s," Rosenberg said.
In an interview earlier this year, Charron said that even during this economically difficult time, the company could announce any day another brand introduction that would expand its reach even further.
"As we speak, our product is selling pretty much across the board," he said. "We’re diverse: Our portfolio of 26 brands is sold in 26,000 venues around the world. So, when a consumer has an interest in fashion, apparel and accessories, my sense is there ought to be a product at Liz Claiborne Inc. to meet his or her needs. There’s not a limit to what we can do. Can this company be a $10 billion company? Sure, if the management is imaginative enough, disciplined and thoughtful."
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