TOUGHER TIMES AHEAD FOR SUPPLIERS
Byline: Thomas Cunningham
NEW YORK — As they struggle with slack demand for basics and soft sales at some department stores, apparel makers will be fighting hard for their profits well into 2000, according to Wall Street analysts.
Although most apparel companies had an easy first half in 1999, department stores sales slowed in the second half and that trend will likely continue through next year, said Christine Kilton Augustine at ING Barings.
“Its still a difficult environment because there is more competition outside the department stores,” she said, pointing to the success of specialty chains and discounters. “It’s forcing brands to become more efficient and find new ways to grow.”
Josephine Esquivel of Morgan Stanley Dean Witter concurred.
“I think it could be a tougher year,” she said. “At the the core apparel names, I see a 15 to 16 percent earnings increase next year.”
However, despite weakness at the department stores, the economic fundamentals remain solid, according to John S. Pickler, of Prudential Securities.
“I don’t know any reason why apparel sales should be any better or any worse next year, compared to this year,” Pickler observed. “The economy is good, employment levels are good, and interest rates are under control. It should be another year of moderate growth.”
The next year promises a busy schedule of product launches, including Tommy Hilfiger and DKNY juniors lines in spring and Kenneth Cole contemporary sportswear, Nine West contemporary sportswear and Nautica jeans in the fall. Meanwhile, the Ralph Ralph Lauren juniors line, Lauren large sizes, and Lauren jeans — all licensed to Jones Apparel and introduced this year — will continue their rollout in 2000.
“Contemporary is a huge focus for the department stores and the brands are going after it, so that’s going to be much more competitive than it has been,” said Augustine, adding that men’s contemporary will also be hotly contested next year.
The trend in the market continues to be away from basics and toward fashion, according to Pickler. For instance, in dress shirts, buyers are favoring darker colors and in bottoms newer fabrics are displacing standbys like cotton twill, he observed.
“There’s a shift toward novelty within the fashion business — whatever has beads or glitter,” said Esquivel. “I think people want something a little different.”
Moreover, Augustine said that the millennium may spur a move back to dressier styles that persists long after the holidays are over.
“The customer wants to be comfortable and that is not going away, but there may be a backlash,” she said. “I think we will see a return to career and an even greater interest in dressing up after [Jan.1].”
The mass market will get more attention by the major players, and Augustine expects that Jones will announce an exclusive deal with a middle-market or mass retailer that will turn one of its Nine West brands — possibly Pappagallo — into a complete collection with apparel, accessories and footwear, she said.
And despite the hype, online selling will not have much impact on the bottom line of the vendors, either in the fourth quarter or next year, Augustine said. Some makers, like Claiborne with Lucky Dungarees, will experiment with direct selling online but to avoid channel conflict, they will focus on brands that are not strong with their core department store customers.
In the third quarter, profits for a group of 20 apparel makers slid 25.1 percent, dragged down by a major loss at Fruit of the Loom. Excluding FTL, earnings gained 11.1 percent as declines by many basics makers, like VF Corp., were offset by big gains at Jones, Warnaco Group and Hilfiger. Sales for the group moved up 11.5 percent.
For most apparel makers, fourth-quarter sales were weak through early November although they may have firmed up at the end of the month, according to Pickler.
“It’s going to be kind of close as to whether most of these companies make their sales budgets,” he said. “The good thing is that because they are concerned about their revenues, they are managing overhead, so most should make their earnings estimates.”
Hilfiger should continue its growth streak with the success of its juniors and women’s lines, according to Esquivel. She estimated earnings of 75 cents a share against 61 in the quarter, $2.42 against $1.77 for the 12 months, and in calender 2000, Hilfiger will earn $2.90 a share.
After a difficult period, Polo Ralph Lauren is back on track to deliver respectable returns in upcoming years, according to Jennifer Black of Black & Co. in Portland, Ore.
Licensing is a key growth area for Polo, said Black. And more growth will stem from the recent acquisition of Poloco, its European licensee, she said. Black estimated Polo will earn 34 cents against 28 cents for the quarter and $1.45 against $1.26 for the year. Next year, Polo should earn $1.74 a share.
At Jones, growth drivers include jeans and large-size additions to Lauren by Ralph Lauren, Esquivel said. Introduced in August at 150 doors, both lines will continue to expand, she noted. Increasing contributions from the Ralph Ralph Lauren juniors line and Evan-Picone sportswear should also boost profits. Esquivel estimated that Jones will earn 37 cents a share in the fourth quarter, compared to 30 a year ago, bringing its full-year profits to $1.98, up from $1.47. In 2000 Esquivel predicted Jones will earn $2.45 a share.
Liz Claiborne also ensured a fatter volume with acquisitions this year of Segrets, Lucky Dungarees and Laundry. Those deals could add up to $700 million to the maker’s top line in three to five years, according to Augustine. The deals also diversify Claiborne’s distribution, since most of these brands are aimed more at specialty stores than department stores, where Claiborne is a powerhouse.
Growth will also come from Claiborne’s arrangements to produce contemporary, junior and status denim lines under the Kenneth Cole name and the addition of a DKNY better sportswear line to Claiborne’s existing DKNY jeans, activewear, and juniors collections. Long term, the three Kenneth Cole lines could have annual revenues of at least $550 million, while DKNY, scheduled to launch at 250 doors in spring 2001, should have annual sales of $200 million within three years, according to Augustine.
One note of caution, however: Investments in marketing and infrastructure for the Kenneth Cole lines and DKNY sportswear will put some pressure on Claiborne’s margins in the first half of next year, Augustine added. She expects the company to earn 84 cents a share in the fourth quarter, bringing full-year profits to $3.10. That compares to year-ago results of 73 cents in the fourth quarter, excluding a restructuring charge, and $2.83 for the 12 months. Claiborne will earn $3.40 in 2000, Augustine estimated.
Basics and innerwear giant VF Corp. had a disappointing third quarter, hurt by softness at midtier department stores, weak European sales and temporary shipping difficulties caused by systems upgrades at distribution centers in the U.S. and Europe.
Although the department store channel will likely remain tough for VF in coming months, mass sales are growing, according to Pickler. He estimated VF will report earnings from operations of 76 cents against 84 cents in the quarter and $3 against $3.10 for the year.
Next year, though, VF should be back on track with earnings of $3.30, Pickler said.
Warnaco’s earnings for the third quarter jumped 64.7 percent, despite the loss of several retail accounts, including Uptons and T. Eaton, which both liquidated this summer. Although warned that it is not entirely comfortable with the estimates, Esquivel has Warnaco earning 96 cents in the quarter against 78 cents and $2.60 against $2.25 for the year. In 2000, Warnaco should make $3.05 a share, she said.
And will Warnaco will buy Calvin Klein? Augustine said probably not.
“In my opinion, it will more likely be a European luxury goods company,” she said.
Nautica will have a tough fourth quarter, but should be back on track for 2000, according to Esquivel. She calls for per-share results of 48 cents against 51 for the quarter, and $1.23 against $1.42 for this year. Next year, earnings should climb to $1.53, she estimated.