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NEW YORK — Long before diversification was a hot term in the apparel world, Kellwood Co. was looking for ways to give variety and balance to its portfolio.
This story first appeared in the December 4, 2002 issue of WWD. Subscribe Today.
Ever since making its first big acquisition into women’s branded apparel in 1985 with Cape Cod-Cricket Lane Inc. — now the company’s moderate-priced Cricket Lane Collection — Kellwood has been in serious pursuit of acquiring companies and striking licensing deals.
Through a combination of acquiring companies and buying brands, Hal Upbin, chairman, chief executive officer and president, said Kellwood, a company that started some 41 years ago and has grown into an industry leader, has the potential of becoming a $3 billion company over the next three to four years.
“I don’t like to plan that way, but I do believe we can do $3 billion. But we’re in a deflationary cycle going on five years, so we’ve got to sell more units just to make the same dollars,” he said. “It’s a multifaceted growth program, a combination of organic and acquisitional growth.”
Kellwood was on the acquisition trail as far back as 1980, when it acquired well-known backpacking and hiking equipment maker Kelty Pack Inc., followed by shirtmaker Smart Shirts Ltd. of Hong Kong, a strategic move that significantly boosted the company’s presence in the Far East. Today, Smart Shirts is one of Kellwood’s top-performing units.
Just last month, its latest venture was announced: a licensing deal with men’s wear giant Phillips-Van Heusen to produce an Izod women’s lifestyle collection starting with spring 2004 — adding another brand to its expansive repertoire. The company also expanded into children’s wear this year via Gerber and into branded designer intimates through an Oscar de la Renta licensing agreement.
“The positioning and quality of the Izod name coupled with Kellwood’s core strengths of value, fashion and product diversity is a powerful combination,” Upbin said at the time of the announcement, calling Kellwood “the originator of the multibrand, multichannel apparel strategy.”
Kellwood’s appeal seemed evident to a prospective business alliance, as Mark Weber, president and chief operating officer of PVH, said: “We have had the opportunity to license the brand into women’s wear and have declined offers made by a number of people. But we chose to wait and partner with a world-class company.”
What attracted PVH to Kellwood specifically was that it’s a company with sales in excess of $2.3 billion and with expertise in “design, sourcing and marketing,” Weber said.
Vanessa Castagna, chairman and chief executive officer of J.C. Penney stores, said the retailer has long had a good relationship with Kellwood.
“Over the past couple of years, we’ve made dramatic changes in the way we do business at J.C. Penney,” Castagna said. “Kellwood was not only one of the first to embrace our changes, but also provide new ideas, trend-right information and logistical solutions to make sure our customer gets what she wants, when she wants it. Teamwork and service are two big reasons why Kellwood is such a valued resource for J.C. Penney.”
But Upbin is not one to make false promises about his company’s strengths.
“We are who we are,” said Upbin, a former CPA who joined the company in 1988 when Kellwood acquired American Recreation Products, where he was part-owner and president. “Our great core strengths are in sourcing, pricing and distribution.”
Kellwood’s portfolio today spans about 20 brands, as well as more than 300 trademarks ripe for possible brand extensions and labels. Its main apparel brands include Sag Harbor, Koret, David Meister, Democracy, David Dart, Sangria and Jax, and licenses with Emme, Bill Burns, Wilson socks, Stan Herman robes, Nautica men’s dress shirts, men’s sweaters and outerwear under Slates, Gerber children’s wear, and Izod women’s sportswear.
Analysts have estimated that Sag Harbor, its biggest brand, has annual sales of $500 million to $600 million. Its second-largest business is Smart Shirts, which does more than $300 million.
Leading a company as large as Kellwood does not come without a price, and Upbin said the last 14 years have been challenging. He became ceo in 1998, adding to his role as president, and one year later, he was elected chairman, following the retirement of William J. McKenna, who remains chairman emeritus.
“It’s really been a challenge, but it came in stages,” Upbin said. “In the early days in the late Eighties and early Nineties, it was kind of business as usual. Then, businesses started to consolidate at the department store level and we at Kellwood saw a need to become far more efficient in terms of being value-added at retail. There, suddenly, was intense competition. Wal-Mart was gearing up full blast and Penney’s had restructured itself as a soft goods retailer. Some formats were changing and we needed to respond to all of that.”
A big change in the company’s dynamic under Upbin’s reign has transformed Kellwood from a brand holding company to an aggressive operating entity. In 1996, Upbin initiated a program called Vision 2000 to prepare for the 21st century. Its sole purpose was to eliminate redundancies and improve efficiency.
“Prior to 1995, we would buy companies and they would be maintained almost exactly as we found them,” he said. “We were not offering major operating services and they were really independent. But the luxury of having duplications in each division was ill-served.”
Today, the company is far more streamlined, he said, with operating, financial, sourcing and distribution services grouped by region, as opposed to division. “We really tightened the financial structure,” Upbin said.
Besides the obvious cost savings, this tightening and merging of services was also needed to provide a fashionable product that’s well-priced, something that would not be attainable if overhead costs were still so large, Upbin said.
With the economy’s downturn, value shopping is even more important, he added.
“The consumer wants a product that’s new but at an attractive price, so it requires you to have an overhead structure that’s extremely efficient,” Upbin said. “So one has to become proficient at taking the excess costs out of the supply chain to offer fashion at an extreme price at various channels of distribution.”
The company’s deep roots in diversification is owed in large part to McKenna, who joined Kellwood in 1982 as president and chief operating officer, and later became its ceo and chairman.
“When I arrived at Kellwood in 1981, profits were $215,000, sales were $5.5 million annually and stocks were $9 per share,” said McKenna in a phone interview from St. Louis. “The comparable value of that stock today is over $100 per share.”
For the first nine months of the year, Kellwood reported net income decreased 17.9 percent to $33.6 million or $1.37 a diluted share, as reported. That compares with last year’s profits of $40.9 million or $1.79 a share. Excluding an aftertax provision of $8.5 million or 35 cents for business and facilities realignment, earnings would have been $42.1 million, or $1.72.
Sales for the period also declined, falling 8 percent to $1.67 billion. In the third quarter, sales were either flat or down in all channels, except the discount and national chain pipelines, and overall sales grew 5.3 percent to $633.4 million. By segment, women’s sportswear fell 2.3 percent to $394 million, while men’s sportswear rose 12.3 percent to $123.4 million from $109.9 million a year ago. Kellwood’s smallest segment, other soft goods, showed the best improvement with a 31.7 percent jump to $116 million from $88.1 million last year. In New York Stock Exchange trading Tuesday, Kellwood’s stock closed at $28 a share, down 13 cents, or 0.5 percent, giving it a market capitalization of $715.7 million.
McKenna’s futuristic vision and dynamic leadership helped propel Kellwood in the direction it is now going, with market dominance across several categories. Under his leadership, the company committed to a strategy of developing international sourcing in the Caribbean Basin, Central America and the Far East, acquired Cape Cod-Cricket Lane, its first branded apparel acquisition, and purchased Parsons Place Apparel Co., which is now Sag Harbor.
Still, the company is light years away from its beginnings in 1961, when 15 independent soft-goods suppliers to Sears, Roebuck & Co. merged to form Kellwood. At that time, the new company had 22 plants in 10 states and 7,000 employees. Its combined net sales totaled about $86.6 million. The original product lines included a variety of private label apparel, camping equipment and bedding.
“I was president of Lee Co. and VF Corp., and was recruited to bring Kellwood to the marketplace and to reduce its alliance on Sears, which owned 20 percent of the company and accounted for the bulk of our sales,” said McKenna, who helped shift the company’s reliance on domestic to offshore production, while also scaling back inventory levels. “In making these acquisitions, we diversified our list of accounts, which gave us entry into chains, discounters, department and specialty stores, and removed us from total reliance on Sears.”
Fred W. Wenzel was a founding director of Kellwood, as well as the company’s first chairman and ceo. He became chairman emeritus in 1991, after nearly 30 years. Wenzel was president of Hawthorn, one of the original 15 companies that formed Kellwood.
As Wenzel recalled: “Initially, it was conceived that Kellwood Corporate would only be the bank and do the accounting. Everyone would run his own business as he had in the past. Well, that lasted about 24 hours. Hawthorn was the only division that had any experience in selling anyone besides Sears. All the rest of the divisions sold 100 percent to Sears. One of the original corporate objectives…was to have Kellwood begin to sell to other customers.”
Stephen Ruzow, president of women’s wear at Kellwood, said the company will continue to scrutinize each of its businesses to see how they can be enhanced.
“What we’re doing now is really evaluating each of our divisions and looking at where we can bring in new labels and add new brands into the portfolio,” said Ruzow, citing Izod as an example. “Because we’re so strong in our sourcing and distribution capabilities, we can leverage that and build into other brands. We’re looking at each operating unit, be it Kellwood New England, Halmode, Sag Harbor or Kellwood West, and seeing what branded opportunities there are for us to license. This is in addition to the ongoing acquisition activity.”
One thing is certain: the company is paying more attention to product than ever before, Ruzow said.
“In every one of our divisions, we are focused on updating and modernizing all of Kellwood’s apparel offerings, and strengthening our merchandising and design teams across the board,” he said. “We’ve added new people to bring in fresh, new talent over the past year.
“Where we’ve updated the product we’ve seen results at retail. The fact is, the 50-year-old consumer today is not dressing the way she was three or four years ago and the average size in America is a 14. But the most important thing is just because the clothes are inexpensive doesn’t mean they have to be ugly. It’s all about interpreting the taste level of designer into moderate prices. Business is very difficult today, but the companies that are product innovators are going to win the game.”
Citing Sag Harbor’s recently updated look as an example, Ruzow said retail performance proves that taste transcends price.
“At Sag Harbor, we have an incredible design team and we have gone from a wool blazer to an entire lifestyle collection in tailored sportswear,” he added. “It’s been phenomenal and we’ve seen good increases and it just keeps getting better each season.”
Bob Skinner, corporate vice president of men’s wear, intimate apparel and children’s wear, said there are no launches planned in intimate apparel, such as the introduction of Sag Harbor sleepwear and loungewear in fall 2003. But there are some major initiatives involving men’s active wear on next year’s horizon, he noted.
“Kellwood still has a bigger women’s business because of the total size of the company,” Skinner said. “In intimate apparel, we’re $200 million, and we’re approaching a half-billion dollars in men’s wear. But we do hope to grow the business substantially and we think there’s a lot of potential. Kids’ is our newest platform, having just acquired Gerber as a great brand franchise that we think we can develop much more fully. We are acquisitional and we are staying that way.”