NEW YORK — Major apparel manufacturers had a mixed showing in the first quarter, with some companies in the right fashion niche doing very well while commodity-type firms struggled.
Wall Street analysts predict current winners will continue to pull ahead in the remainder of the year and the overall climate for the apparel business should improve.
Analysts agreed men’s wear is stronger than women’s wear, but noted some women’s apparel makers are thriving in a tough environment.
“Apparel sales in the first quarter were not great, but some niche players are doing very well,” said Faye Landes of Smith Barney Shearson. Jay Meltzer of Goldman Sachs said there were more positives than negatives in the first quarter, and this should continue into the second quarter.
“The tone of most business now is slightly to nicely better, and that, combined with easier comparisons in the second half, should add up to an OK year,” he said, adding retail sales should be moderately positive in the second half. While men’s wear is slightly stronger, Meltzer said, women’s wear is performing solidly, boosted by better styling and more fashion direction.
In a survey of 33 apparel makers, all publicly held with the exception of Levi Strauss Inc., first-quarter sales rose an average of 3.2 percent. Levi, which had the highest sales results, took a $236.5 million restructuring charge in the quarter that resulted in a net loss of $125.8 million. Including the charge in Levi’s results, average profits in the overall group plummeted 87.4 percent. If the charge had not been taken, average profits in the group would have declined 17.3 percent.
Fleece and T-shirt producers continued to suffer from overcapacity problems they faced in the fourth quarter, and results were weak at Fruit of the Loom, Russell and Tultex. Within the women’s fashion end of the business, the still sagging results at Liz Claiborne Inc., the largest women’s apparel manufacturer maneuvering for a turnaround, colored the quarter’s overall results.
On the other hand, strong performers in the first quarter included Jones Apparel Group, St. John Knits, Authentic Fitness Corp., Warnaco Group, Cygne Designs and Kellwood Corp. “There will be more good news ahead at St. John Knits,” Smith Barney’s Landes said, projecting earnings per share of 41 cents against 31 cents a year earlier and $1.67 for the year against $1.35 a year ago.
“They’re talking to the same consumer in new and exciting ways,” introducing handbags and shoes, Landes noted. “The company knows who their customer is better than anybody else.”
“Jones is moving through these tough times in pretty good shape,” said Goldman’s Meltzer, adding that the company has done a “terrific job developing Rena Rowan lines.” As for the new Evan-Picone label, he said buyers’ response has been strong for the line being shipped now.
“It’s a wonderful label with a lot of life in it,” Meltzer said. He projects earnings per share for Jones of 37 cents for the second quarter against 32 cents, and $2.15 for the year against $1.85.
“We can expect continuing consolidation in the apparel industry, and going forward, companies that take market share and offer exciting products will continue to grow,” said Todd Slater, UBS Securities. He said commodity goods producers will face increasing pressure, whereas more “fashion-oriented” companies such as Warnaco, Kellwood and Jones will succeed. Slater projects double-digit annual earnings growth for these three. “Kellwood takes market share through aggressive acquisitions of smaller competitors,” Slater noted. While Kellwood did not meet its own ambitious plan in the quarter ended April 30, Slater said, he projects a return to high double-digit earnings growth by the end of the current fiscal year.
“They’re in every single channel of distribution, which offers good protection,” he said. For the current quarter, he projects flat sales but earnings of 50 cents a share against 48 cents a year ago, after adjusting for a 3-for-2 stock split in February.
Warnaco is benefiting from sales of the Miracle Bra at Victoria’s Secret and much stronger than planned growth in its business with Avon, Slater noted. The company is also getting good leverage from an improving balance sheet.
“It should be a good second quarter, and could surprise on the upside,” he said, projecting earnings per share of 46 cents in the quarter, against 28 cents, and $3.30 for the year against $2.68.
“Cygne Designs is a terrific company and should perform very well for the rest of the year,” said Smith Barney’s Landes, who projects earnings per share of 17 cents for the second quarter against 14 cents on fewer shares, and $1.32 for the year against 92 cents.
Landes noted Cygne will spend some time maximizing advantages of its acquisition of Fenn Wright & Manson in April and might make other acquisitions. Cygne also might expand its customer base to include The Limited Inc.’s Structure division and Victoria’s Secret Stores, Landes said. In the quarter ended May 1, 1993, sales to Limited Stores and Express accounted for 32.6 percent of Cygne’s net sales, and sales to Ann Taylor made up 63.1 percent. The Limited Inc., through an affiliated partnership, owns 10.2 percent of Cygne’s stock. Cygne and Ann Taylor are involved in a joint venture.
Among those hurt by weak sales at retail were Liz Claiborne and Bernard Chaus Inc. “Liz Claiborne was very hard hit by industry conditions and by overcapacity, but has made progress getting the house in order,” Meltzer noted. He cautioned the turnaround may not come in 1994, but said the second half should improve. Meltzer projects earnings per share of 20 cents for the second quarter, against 38 cents a year ago, and $1.60 for the year, against $1.54, before a 2-cent-a-share accounting gain.
Josephine Chaus, president and chief executive officer of Bernard Chaus, invested $3 million of her own money in the loss-riddled company in the quarter ended March 31. She said losses deepened from markdowns and lower sales, but inventory has been cut. Turning to fleece and T-shirt companies,
Meltzer said they were particularly hard-hit last year and into the first quarter of this year. “Now it seems to be coming back a little bit,” he added. “Price increases will put some stability under the industry, and we should start seeing better earnings.” Meltzer projects Russell Corp. will have a flat to down June quarter, estimating 30 cents a share against 31 cents a year ago, and $1.80 for the year against $1.75.
“Tultex is getting clobbered,” noted Edward Johnson of Johnson Redbook. “There are some price increases going in, but they are sold out for this year so they won’t benefit until 1995.” He projects a second quarter loss of 20 cents per share against a loss of 4 cents a year ago, and a profit of 25 cents for the year against 16 cents.
“Orders are picking up in the marketplace,”he said, adding he hopes Tultex’s results will improve.
Following Fruit of the Loom’s announcement that it had cut back too drastically on production after a fourth-quarter fleecewear glut, and now cannot meet orders, Johnson slashed his estimates. He now projects 50 cents a share for the second quarter, against 77 cents a year ago, and $2.15 for the year against $2.22 from continuing operations last year. “They now have lower than expected volume and face price weakness,” he said.
“VF Corp. was hurt by a slowdown in jeanswear at retail in response to an overload, and had similar problems in T-shirts and sweatshirts, facing industry-wide overcapacity,” Meltzer noted. He added there have been some transition problems moving the Lee brand out of the mass merchants into department stores. He said it was a smooth transition in jeans, but not as smooth in T-shirts and fleece.
“The problems are behind them, and business is firming up,” Meltzer commented, projecting 10 percent earnings per share growth annually. For the second quarter, he is looking for 85 cents a share against 83 cents.
As for the effects of cotton price hikes, Meltzer noted the raw material is a relatively small part of the final cost of the garment, but said he does expect higher prices for many forms of apparel next year.