WWD.com/fashion-news/fashion-features/warnaco-looks-west-aims-to-turn-op-into-1b-brand-704414/
government-trade
government-trade

Warnaco Looks West: Aims to Turn Op Into $1B Brand

Dipping into the California beach lifestyle market with its recent $40 million buy of Ocean Pacific marks a new wave for the Warnaco Group.

View Slideshow

IRVINE, Calif. — Dipping into the California beach lifestyle market with its recent buy of Ocean Pacific Apparel Co. only marks the start for Warnaco — it’s determined to ride the brand into a $1 billion player while searching for even more West Coast deals.

Those two challenges fall to Richard “Dick” Baker, who remains OpAC president while joining Warnaco’s senior management, where his responsibilities will include canvassing the marketplace for similar opportunities for his new employer.

“We’ll be able to utilize his talents beyond Ocean Pacific and Op,” said Joe Gromek, Warnaco Group Inc. president and chief executive officer, in an exclusive interview at the OpAC headquarters. “We would ask him to ferret out other brands in California — or beyond — if it makes sense. Brands that he can build this licensing model on that would allow us in-house to be a vertical part of the process. Our business has sufficient cash flow to support those kinds of initiatives. The sooner the better.”

Heightened acquisition interest in the action sports industry is becoming more the norm than the exception these days. Billion-dollar surf behemoth Quiksilver added the skateboard-focused DC Shoes last spring to its 13-brand stable, which includes the golf line Fidra. Meanwhile, Nike’s 2002 purchase of Hurley International continues to be referred to as a benchmark of outsider companies buying into the longstanding insiders’ club of surf and skate entrepreneurs.

And observers within and outside the surf industry have said that representatives from Liz Claiborne have been exploring the market in recent months. With Op now sold, just who is up for grabs next is mostly speculative — although at least one small, reputable brand, Fresh Jive, is considering putting up its sign.

Paul Altman of Sage Group, the investment banking firm that advised OpAC, as well as DC Shoes in its acquisition by Quiksilver, observed that strategic buyers in the mergers and acquisitions sector have a lot of competition these days from financial buyers also looking to do deals in the apparel sector. “The M&A market is dramatically different from what it was a year ago,” he said. “We also see strong market multiples for many of the deals. Op’s financial success, growth trajectory and nice mix of distribution made it easier to sell. But as in any deal, it is still the brand that drives the value.”

This story first appeared in the August 11, 2004 issue of WWD.  Subscribe Today.

Cheryl Carner, national director of retail finance for Capital Source Finance, calls the current time period a “perfect storm” for sellers. “You have a lot of money that the private equity firms raised back in 1998 to 2000 that has to be invested, and the strategic buyers all looking to do deals. The sellers see all this, and it makes many think that this is the right time to sell. The amount of capital that is available makes it easy to get the deals done.”

But the board-sports arena, let alone brands not currently in the Warnaco portfolio, isn’t the only place where Baker’s new employers expect to use him. Gromek immediately named as one example Speedo, the crown jewel of Warnaco Swimwear Group (formerly Authentic Fitness), under which OpAC will operate. Baker will primarily report to group president Roger Williams.

“He can add tremendous value with Speedo,” said Gromek, in reference to the 35 licensees — including home, accessories and fragrance — in 83 countries Baker set up under his watch. “His licensing model makes sense, and he knows how to do it well. I think he could be very helpful to the whole Speedo organization to really move that business forward quickly.”

As reported last week, Warnaco acquired OpAC for $40 million in cash and the assumption of $1 million in debt. The agreement provides for future performance-based payments that could up the total price to $45 million to $50 million. The acquisition is expected to close during the third quarter.

Gromek flew in from New York for the day last Thursday along with Stanley Silverstein, senior vice president of corporate development and chief administrative officer. The two arrived at OpAC’s offices with Williams for a closed lunchtime conference to introduce themselves to the company’s two dozen employees, discuss their plans and field questions.

Immediately following the 40-minute session, the mostly twenty- and thirtysomething staff looked joyful as they swarmed the trays of sandwiches and fruit. If there were to be any alterations to the current team, it would be in additional support.

“They’re totally empowered. They have creative license to do what they have to do, from the design to the product development to the marketing, as they’ve always done,” said Gromek.

The licensees should be breathing a sigh of relief, too, at least for now. “Where the licensees today are doing a great job, we thank them and appreciate their work and look for them to keep doing it,” said Gromek. Whether that was a veiled code to those who were not up to par, he would only refer back to the statement — and reemphasize that Baker has managed and positioned the brand well globally.

“However, where there are not areas licensed, we’ll look at whether it makes sense to do it externally or internally,” he added. Warnaco could fully profit by taking some of the licenses in-house. A Warnaco-produced intimates line is a natural add-on, the executives admitted. And misses’ and juniors swim is now licensed by Apparel Ventures.

But there’s no time frame set for how soon any of this might happen. “It’s August, and we’re in the middle of spring 2005 as it is,” said Baker.

Top of the agenda as spring market begins at month’s end with MAGIC in Las Vegas is the repositioning of the Seven2 line from an edgy collection of sportswear separates to a fashion-forward premium denim line. Introduced in 2003, the brand is a name play on Op’s founding year and falls under the company’s Op Collection division, which also includes Op Classic, an offering of the company’s iconic reissues. Both target teens and twentysomethings and are sold in better department stores such as Bloomingdale’s, core surf shops or trendier doors such as Fred Segal in Los Angeles.

Rounding out OpAC’s four sub-brands are the contemporary-minded Op signature brand, which sells at Kohl’s, May Co. and Federated stores, along with Ocean Pacific, targeting the older 22- to 45-year-old set and currently sold at J.C. Penney. But plans are under way to expand Ocean Pacific distribution to other midtier retailers.

Steps away from the meeting with the staff, the new team further rhapsodized on the deal in the OpAC chief’s corner office.

“This is all about scale,” noted Baker. “That’s where I see the opportunity: the multitier strategy, the multibranding strategy, all of which has been successful in other very large global brands. In the last five years we’ve done that on a much smaller scale. With a parent like Warnaco, this allows us to do even more.”

Doubling the brand’s “$450 million worth of product at retail today,” said Gromek, shouldn’t be a stretch. While Europe and Asia account for one-third of its business, that barely scratches the possibilities of Warnaco’s significant retail power in those markets.

“The distribution channel and the strategy is exactly on the path we’ve been on,” said Baker of the brand’s mostly midtier department store distribution. “It’s just taking the individual businesses that we’ve carved out and growing them at a rate that’s appropriate to the size.”

Signature retail is also in the future. It’s just going to take a while. After all, pointed out Gromek, women’s sportswear needs to be introduced. The 32-year-old brand has offered juniors through much of its history. Until now, it’s simply been a matter of not finding the right licensee. “I think it would make a lot of sense to have a flagship somewhere in Orange County,” he observed.

While Quiksilver is abuzz with its new entertainment arm, producing films and television programming and publishing books, and Billabong and Volcom similarly are investing significant resources in media endeavors, OpAC won’t be treading those waters anytime soon. “An entertainment division would not be appropriate in this infrastructure,” Baker noted.

But whatever the long-term development of OpAC may be, for now, industry observers — including Wall Street — are applauding the deal with Warnaco.

Elaine Hughes of the executive search firm E.A. Hughes & Co. believes it’s an excellent deal for OpAC. “Because Baker transformed the business to a licensing operation, the money that ordinarily would have been used to support a manufacturing infrastructure could be spent instead on developing the brand to where it is today, one of the top 25 recognized brands. Warnaco has been right sizing all of its divisions, putting in leadership, focus and synergy to the back-end functions. They have an expertise in brands and how to position them in the market for growth. I think this is a great deal for both firms,” she added.

Lee Backus of The Buckingham Research Group wrote, in a research note on Warnaco, “We have known Dick Baker, the president of Ocean Pacific, for many years and found him to be a seasoned, talented, dedicated executive. Under the direction of Baker and utilizing the resources of Warnaco, we see significant growth for this brand.” Backus also wrote that his firm continues to recommend the purchase of Warnaco shares. Buckingham’s stock rating is a “strong buy.”

Backus added that the assemblage of a management team and stable of brands by Warnaco’s ceo “should provide good long-term top-line growth and improved operating profit margins.”

Jeffrey Klinefelter, analyst at Piper Jaffray, wrote in his note that the purchase of OpAC “is a nice, synergistic, tuck-under acquisition for Warnaco. Management indicated that the acquisition will be accretive in fiscal year 2005 and our first pass at the transaction led us to at least an incremental four cents next year.”

Klinefelter noted that because of Warnaco’s existing presence in “swimwear and sportswear sourcing, we would not be surprised to see Warnaco bring some of the OpAC licenses in-house as the current licenses expire. We expect the wholesale and licensing revenue for Op to continue to grow at a double-digit pace this year and beyond.”

OpAC’s wholesale revenues in 2003 from its licenses was $210 million. Klinefelter concluded that OpAC had $3 million in net income last year, assuming licensing revenues earned by Op were “$15 million with an operating margin (net of management fees) of approximately 20 percent.”

Piper Jaffray has an “outperform” rating on shares of Warnaco.

And the accolades over the deal only solidified the victory for Baker.

When the amicable, silver-haired apparel veteran arrived in the action sports arena six years ago, he was a relative unknown in the insiders’ club of surfing executives, many of whom held steadfast to the notion that only a board rider could run a surfwear company.

One of the original Golden State beach brands, Ocean Pacific was founded by two surfers, along with the help of a finance-minded pal, in 1972 in the seaside Southern California town of Encinitas, an hour north of San Diego.

Never mind that one of those original surfers was at the helm when OpAC filed for bankruptcy in 1992. Although cofounder Jim Jenks rode the company to sales of $700 million, OpAC, like the rest of the surfwear industry, didn’t prepare for mainstream tastes to shift so dramatically away from their product offerings, as they did in the late Eighties. It was a hard lesson the industry has since committed to memory by leveraging its heritage with a broader fashion potential.

In 1998, Baker and his partners in the San Francisco-based investment group Doyle & Boissiere acquired OpAC from Berkeley International Capital Corp. OpAC, headquartered here a short drive from postcard-perfect Laguna Beach, became a think tank for an increasing portfolio of licensees, working closely with them from conception to distribution. Baker led the repositioning of Op as a classic American brand rooted in the California beach lifestyle, no doubt informed by his former stints as president of Tommy Hilfiger juniors and Esprit, where he has said he fully learned the potential of branding a company as “lifestyle.”

As the company’s sales and credibility grew, so did the buzz that Baker was quietly shopping the brand in order take it to the next level of growth.

Sage’s Altman said Baker’s shift of the brand to a “mainstream” concern works in its favor. He disclosed that a number of strategic and financial buyers had expressed an interest in OpAC. Warnaco beat out the competitors because it offered both a better price and greater opportunities for growth of the Op brand.

“The surf and surf-related concepts have become more mainstream in the last couple of years. In the case of Op, Warnaco knows how to take what is a strong brand to a broader audience. Surf is no longer a fad, but a lifestyle,” Altman added.

Baker couldn’t agree more, and with Warnaco behind him, he believes Gromek’s billion-dollar goal will be a reality. “Believe me,” he said, “the growth in the next five years is easier to envision than it was envisioning the turnaround five years ago.”

View Slideshow