A DEAL A DAY: FASHION’S WHEEL OF FORTUNE
NEW YORK — One house, one designer, one label — and maybe a perfume license to pay the bills. Fashion used to be a simple game, but there’s a new model now.
Call it the Arnault phenomenon. Or the Bertelli syndrome. Maybe just Wachner’s World. On the populist side, Kellwood and VF Corp. have been doing it for years.
The modern fashion house is home to a family of eclectic brands and affiliates, where billions of dollars, not mere millions, are at stake. The industry powers today, in fact, are complex international organizations of mega-licensing deals, palatial stores, joint ventures and partnerships that can make an auditor’s head spin.
Style and image still count, but the bottom line rules like never before in a bitterly competitive, deal-a-day climate.
The major apparel players are generally public firms that not only have their eyes on profitability, but on the continued growth necessary to sustain and increase the worth of their stock. The price of stock has become as important as the price of cotton, and enticing investors to purchase stakes in the company is now as vital as drawing customers into the store.
Fashion, an industry as dependent on emotion and instinct as it is on sell-throughs and sales charts, historically has been viewed as high-risk on Wall Street. Long-term respectability has been won by a hard battle. Those who have managed to hedge the trendy flash-in-the-pan image have done so through a diversified mix of products and distribution strategies.
Given their history, apparel stocks in the U.S. have done surprisingly well in 1999, according to recent data from brokerage firm Donaldson, Lufkin & Jenrette.
Overall returns for a group of six stocks — Gucci Group, Tommy Hilfiger, Jones Apparel Group, Liz Claiborne, Nautica Enterprises and Warnaco Group — were 35 percent since Dec. 31, 1998. The overall Standard and Poor’s 500 had returns of 9 percent, according to DLJ.
This group was paced by Gucci and Jones, both of which had returns of 49 percent, the report shows. Hilfiger’s returns were 29 percent and Liz Claiborne had returns of 23 percent. Nautica’s returns were 12 percent and Warnaco Group’s were 3 percent.
DLJ has given the group a “market performance” rating, which means it should generate up to a 15 percent outperformance relative to the S&P 500 in the next 12 months.
Among the economic factors driving the fashion giants created by the recent wave of vendor mergers and acquisitions is not only Wall Street’s unyielding demand for growth, but a need — literally — to keep up with the Joneses of the world.
Earlier this year, apparel titan Jones Apparel Group completed its purchase of shoe company Nine West, and last year Jones bought Sun Apparel, the maker of Polo Jeans. This came a year after Jones got the lucrative license for the better-priced Lauren by Ralph Lauren sportswear line.
The predictable, solid growth favored by Wall Street is great while it lasts, but apparel companies eventually reach maturity in their core businesses and must search for new sources of volume.
Ask Warnaco chairman Linda Wachner, who wasn’t satisfied with building her diversified innerwear portfolio or expanding her Calvin Klein businesses. She purchased contemporary mainstay ABS, which at $40 million in annual volume is small for Warnaco, but Wachner said it was the best contemporary brand on the market.
Or talk to Patrizio Bertelli, who, though private, has a thirst for acquisitions that seems unquenchable. Last week, in an attempt to add yet another premium name to his own luxury goods stable, the chief executive of Prada Holding bought controlling interest in Jill Sander and reportedly took a minority stake in Fendi — one of the few remaining family-run Italian fashion businesses, which has been the target of takeover rumors for months. Prada also entered into a joint venture this year with Helmut Lang.
And Bertelli played a key role in one of the most dramatic stories of the year when he made a much bandied stab at buying Gucci, only to sell out his investment to Bernard Arnault’s LVMH for a lucrative profit. Arnault eventually was bested by Francois Pinault’s powerful Pinault-Printemps-Redoute conglomerate, who has designs on a multibrand luxury empire of his own.
Most analysts and executives agree that vendors are taking their cues from the massive consolidation that has taken place among retailers in the last 20 years or so. During the frenzied period, many retail names were gobbled up, creating more powerful retail organizations and far fewer outlets for vendors to sell.
“Customers are getting bigger and there has been consolidation at the retail level, which has sparked consolidation at the vendor level as well,” said Eileen Gormley, an analyst at Pershing, a division of Donaldson Lufkin & Jenrette. “Bigger retailers need strong vendors to supply them.”
Lee Backus, of Buckingham Research Group, said, “The consolidation at retail requires vendors to consolidate, and right now, to have the right sourcing and the right systems is not so easy anymore if you are smaller.”
Soft sales in a company’s core merchandise categories is another driver of acquisitions, new product categories and licenses under a single master brand. A slowdown in sales in Tommy Hilfiger’s core men’s business in the late Ninties pushed the apparel giant to purchase Pepe Jeans — maker of Tommy Jeans — and venture deeper into women’s, children’s and a slew of other licensing deals.
In June, the apparel titan announced three new licensing agreements — for watches, costume jewelry and women’s legwear. In the fourth quarter ended March 31, earnings skyrocketed 68.6 percent to $46.2 million, or 97 cents a diluted share, from $27.4 million, or 73 cents. Results topped Wall Street estimates by 7 cents a share.
And revenues during the quarter rose substantially, to $420.9 million from $202.7 million, largely reflecting the May 1998 acquisition of Pepe Jeans USA, the licensee for Tommy Jeans and women’s lines, and its Canadian business. Women’s sales zoomed ahead 89.9 percent to $111.5 million, fueled by junior jeans, launched last fall.
Hilfiger made new licensing deals with Movado Group for watches for men and women, with Holt Hosiery Mills for women’s hosiery and legwear, and with Victoria & Co. for jewelry for men and women.
Hilfiger now has nearly 30 licensing deals across a broad range of categories, including intimate apparel, belts, sunglasses, footwear, fragrance and even bicycles.
In other licensing deals, Hilfiger’s new fragrance, called Freedom, will be launched in 800 doors this August, and its color cosmetics line makes its debut this month in 100 doors. In 2000, Hilfiger will also launch handbags and bags, and intimate apparel for women, in addition to the jewelry and legwear.
One of the industry’s greatest blue- chip brands, Polo Ralph Lauren Corp., isn’t sitting still either. The company purchased the small but trendy Club Monaco retail chain this year in what some observers considered an unusual move, after Polo sensed maturity in its core men’s wear businesses.
But some analysts cautioned that many of these more recent acquisitions, though bold, were being undertaken without clearly visible synergies, such as Jones/Nine West and Polo/Club Monaco, and there was always the fear that a company could get too large, and a chief executive officer too distracted, and a brand could end up lost in the shuffle.
“It seems like many companies think larger is better and it is hard to figure out what they are thinking in every case,” said Faye Landes of Thomas Weisel Partners. “In the case of Jones, the company clearly felt there were many more advantages to being a $4 billion company than a $2 billion company.”
Gary Catherman, corporate director of KSA Capital Advisors in Atlanta, pointed out that the advantages of becoming part of a larger company are clear: sourcing and marketing abilities, economies of scale and negotiating power with raw materials suppliers and retailers.
On the downside, a purchaser that acquires a new brand runs the risk of stretching its resources too thin, while the company being bought could face internal competition from its new sister brands, and, as is often the case, a strategy of trading the acquired brand down the distribution channel. This can bring initial volume increases, but also a long-term dilution of equity.
These factors could be impediments to the megamergers seen in other industries. In apparel, Catherman noted, the supply chain remains complicated and it can be difficult to manage too many businesses across diverse channels.
Two recent examples of companies juggling too many brands were The Leslie Fay Cos. and the Nahdree Group. Leslie Fay chairman and ceo John J. Pomerantz pointed out, after the company came out of a five-year bankruptcy in 1997, that the company had as many as 18 labels in the late Eighties, and it was difficult to keep an eye on all of them.
Consequently, Leslie Fay spun off its Kasper ASL business in its reorganization, and executives at Kasper have said that now that they’re out from under Leslie Fay’s shadow, they can devote full resources to building their brand and company. They did just that in July when they purchased the Anne Klein trademarks with the intent of building yet another megabrand.
In Nahdree’s case, the merger of Nah Nah Collections with the He-Ro Group in 1997 created a potential social occasion powerhouse. But the company never could get out from under the debt inherited from He-Ro and, observers said, had too many labels in the same market.
On the higher end, Joseph Kanoui, chairman of the Vendome Luxury Group, said the consolidation in the luxury goods sector mirrored what was going on in such industries as banking, insurance, aerospace and pharmaceuticals.
The movement is inspired by the need for greater efficiencies in production, distribution and financing, and for improved returns, Kanoui said. He added that it was also motivated somewhat by economic factors stemming from the introduction of the single European currency.
“However, I do not feel that these are the real driving forces,” Kanoui said. “I prefer to think that the concentration that is presently under way is more to do with a globalization of the luxury business and the high cost of entry.”
Commenting on the dangers of brand dilution, Kanoui stressed the need for autonomy, at least in the consumer’s eye: “From the point of view of the customer, there must be no difference whether a luxury company is owned by a family or a multinational.”
The Gucci-LVMH-PPR Phenomenon
The battle for control of Gucci cast a glaring international spotlight on the new megacompanies of the fashion world. It pitted the once-entrepreneurial Gucci fashion house and its white knight, Francois Pinault and his retail and mail-order giant PPR, against the powerful financier Bernard Arnaut and his LVMH Moet Hennessy Louis Vuitton luxury empire.
LVMH’s appetite for new brands is driven by its need to keep the stock price moving and maintain market leverage and production and distribution synergy. Arnault’s oft-stated belief is that customers should never know that the same people are behind a Vuitton bag and a Christian Dior lipstick — but real estate agents and those handing out the discounts for group media buys should be hit over the head with the synergies. In fact, the production synergy those Italian factories of Gucci’s would bring was one of the most seductive aspects of the proposed LVMH/Gucci marriage — a notion that also caught the eye of Prada’s Bertelli, who, as noted, had bought his own sizable stake in Gucci.
In recent years, LVMH has branched out from its main activities of fashion, leather goods, and champagnes and spirits, and has become intensely interested in controlling distribution of its products.
In 1996, LVMH scooped up duty-free giant DFS and six months later acquired the Sephora perfumery, which is rolling out worldwide and beginning to reshape the landscape of beauty retailing.
Still, LVMH is based in France, and now Arnault seems focused on broadening his horizons. The group has picked up tiny but trendy beauty brand Hard Candy and Bliss Spa, the niche brand based in New York’s SoHo, and Arnault has also taken a stake in Gant.
He is venturing aggressively into cyberspace, with a $500 million investment in Europ@web, created from his personal holding company, Groupe Arnault. Since January, he has taken a strategic stake in about 20 online startups, to the tune of more than $100 million.
They include the Swedish online sports apparel retailer Boo.com. He also has a $300 million share of Datek, the U.S. Internet investment house, and a $50 million stake in PlanetRx.com, the U.S. online pharmacy.
LVMH’s newest arch rival, PPR, is a distribution conglomerate controlled by Pinault through his Artemis holding company. The group owns a 40 percent-plus stake in Gucci and plans to build a new European luxury power through its Gucci holdings and Artemis’s new ownership of the Yves Saint Laurent fashion and beauty brands, along with a host of other beauty labels Artemis acquired from Sanofi in March. These beauty brands are to be sold to Gucci.
PPR has a variety of assets centered on the distribution of goods to professional industries, like the Rexel electrical equipment company; the retailing of goods to individuals, via the Printemps department store chain, or Redcats, the international mail-order group.
Serge Weinberg, PPR’s chairman, is a cool-headed manager who gives his company presidents a lot of freedom in running their operations. Both Pinault and Weinberg are strong believers in decentralization, an operational sentiment they shared when they announced PPR’s acquisition of the Gucci stake and Artemis’s purchase of the Sanofi brands on March 19.
“We don’t believe in integration,” Weinberg stated at the time. “We believe in strong management.”
Weinberg’s insistence on PPR being a “decentralized” group that “tries to maintain the independence of its companies” is truly how the group works. The Printemps department store chain, headed by Per Kauffman, and the FNAC audio-visual, music and bookseller, run by Pinault’s son, Francois, operate separately even though both are consumer products retailers.
This is not to say that PPR shuns synergies. A concrete example of such exploitation is seen in the recently issued American edition of La Redoute. Thanks to PPR’s acquisition of Brylane last year, La Redoute, France’s largest mail-order book, was able to develop an American catalog marketing women’s apparel. The new catalog was developed using the marketing and merchandising expertise of Brylane to adapt the goods to the U.S. market, along with Brylane’s various client databases, but relies on La Redoute’s fashion design.
Deal-making in European fashion circles heated up in 1996 with Ferragamo’s purchase of the house of Ungaro and Chanel’s acquisition of swimwear maker Eres, noted a study by French boutique agency Media Invest. Subsequent deals include the Vendome Group’s 1997 purchase of French leather goods house Lancel, Spain’s Puig Group’s acquisition of Nina Ricci in 1997 and HdP’s buy of Valentino last year.
“As usual when observing a consolidating industry, each player has its rationale for its acquisitions — economies of scale, brand portfolio strategy — but when observing all the players together, the main cause of consolidation appears to be competition,” said Karine Ohana, a partner in Media Invest.
She noted luxury companies compete with one another in advertising, retail networks and generating the cash needed for them, in addition to their competition in design and product.
“It is increased competition in those three areas that makes companies succeed independently, join forces or die,” Ohana said.
Ohana observed that big groups such as LVMH were simply more efficient at purchasing and developing midsize firms than they are at creating their own companies. Kenzo and Celine are examples of success, Ohana said, thanks to their ability to exploit existing infrastructure at LVMH. By contrast, the lackluster performance of the Christian Lacroix business, which Arnault created in 1987, has been a perennial thorn in his side.
“This category of companies is usually built around the designer’s personality and strength of this image. The strategy is generally based on a unique brand promotion and development,” said Ohana, pointing to Gucci as a good example.
“It is a challenge for a mono-brand company like Gucci to become a multibrand corporation, and there is a certain degree of uncertainty that it will succeed. It is easier to integrate a brand into a corporation that is by nature a multibrand [group] and whose policy is to preserve the full identity and autonomy of management of each brand.”
Italy’s New Regime
Italy’s fashion industry is in the midst of a revolution.
Companies that once counted on their names alone to generate sales are looking for new ways to grow and diversify, while young design houses are seeking partners with deep pockets to help them build businesses in an increasingly competitive marketplace.
In addition to Prada’s and Gucci’s activities, Ermenegildo Zegna purchased Agnona, Ittierre bought Malo and Romeo Gigli, and HdP took over Valentino. In each case, the larger company is seeking to expand and move into other markets, while the smaller one is looking for the cash injection and industrial support necessary to survive.
HdP’s chairman and ceo, Maurizio Romiti — another executive in quest of a luxury goods empire — said HdP planned to invest $50 million to $80 million in Valentino in the next three years. That money, he said, would be channeled into advertising, store renovations and the commercial division of the business. For fall-winter 1999, the company boosted its advertising budget 20 percent.
Romiti pointed out that by the beginning of September he would be ready to present his plans for HdP’s luxury division. As reported, HdP has a $600 million cash pile, and its aim is to create a luxury goods group that includes fashion and accessories companies.
Romiti said the plan would also include future strategies for the clothing manufacturer GFT, which he insisted would not be sold or downsized. Industry sources, however, speculate that GFT — which lost the license for Giorgio Armani’s Le Collezione’s women’s line and for the troubled Emanuel line this year — might be turned into a distribution company.
“Two things are happening: The fashion business is becoming more professional, which means there’s a greater emphasis on quality, service and deliveries than there was in the past. Second, there is an increased focus on profitability,” said Andrea Ciccoli, a consultant at Bain Cuneo & Associati in Milan.
“This business used to be about margins, which were high when designers like Armani, Versace and Ferre were growing fast. Since the boom years of the 1980s, however, margins have shrunk and expenses have grown. Today, the fashion business is about investment for the long-term growth of a brand.”
Ciccoli pointed to the Prada and Lang joint venture as an example of a new business model. “You can be the most talented designer in the world, but you don’t get to the top by being good. You need a full line of products, flagship stores, a controlled distribution channel, major investments in advertising and promotion, and a structure that controls your service level.”
Ciccoli speculated that through the new joint venture, Lang would be able to count on long-term investments in his brand, rather than having to ask licensing partners for money to invest in short or medium-term projects. He added that Prada would also come out a winner.
“Prada was smart to take on a growing brand with a lot of potential,” Ciccoli said. “They will now be able to build their own critical mass in the clothing, fragrance and eyewear markets, not to mention growing their industrial operations.”
As reported, Prada plans to invest $28.4 million in building Lang’s distribution network. The company also plans to launch a collection of leather accessories under the Lang name.
Then there’s Gucci. Even though recent machinations seem to put the venerable firm in the role of takeover victim, industry sources said Gucci had been sniffing around for some time, looking for ways to storm new markets.
Ceo Domenico De Sole put it this way: “Our dream was always to make Gucci a great brand…but on the other hand, our long-term dream was to create one day a great pole de luxe to take what we’ve done with Gucci, apply that to other brands, and create a great European and global group.”
Zegna, Italy’s most prominent men’s wear manufacturer and retailer, purchased a controlling stake in Lanerie Agnona, the women’s cashmere fabric and clothing company, earlier this year in a bid to reenforce its presence in the luxury goods market. Industry observers said the purchase would allow Zegna to enter the women’s luxury market without forcing it to launch a new women’s line under the Zegna name.
One Italian who is trying to build a group that’s present in various segments of the fashion and luxury goods market is Tonino Perna, the chairman of GTP Holding. GTP controls the publicly quoted Ittierre, which produces jeans and young lines under license for Versace, Dolce & Gabbana and Gianfranco Ferre.
In the past two months, Ittierre has acquired the luxury cashmere company Malo and the Romeo Gigli brand name in a bid to transform itself from a licensee to an owner of brand names and structure the business for the long term.
And Perna’s group controls the Italian arm of Diners Club International and has just purchased Franco Maria Ricci Editore, which publishes glossy art, fashion, travel and photography books.
The American Way
It took a long time for the fashion industry to catch up with “The Bigging of America” that took place in the Seventies and Eighties in the related fields of retailing and mall development, not to mention banking and other consumer product sectors. The Nineties has seen the rise of the apparel corporate giant from the insular system of small-to-medium-size firms focused on a single business.
Then came a wave of companies going public at the same time the vendor community was dealing with a consolidated retail base. What has emerged is a land of giants, where wholesale business is increasing controlled by fewer, bigger companies. This includes a plethora of mega-brand licensing deals, a host of acquisitions of small companies by larger ones, mergers of similar-size firms and purchases of companies with synergistic value.
VF Corp., considered to be the largest apparel manufacturer in the world, may have the corporate style of a gentle giant, but it carries a big stick.
Despite overwhelming success — VF’s 1998 earnings rose 10.6 percent to $388.3 million from $350.9 million and sales moved up 4.9 percent to $5.48 billion from $5.22 billion — Mackey J. McDonald, its chairman and ceo, hasn’t been content to let the company rest on its laurels.
Acquisitions are key to VF’s growth, said McDonald, an executive who often wears jeans — one of the company’s signature products — to meetings. In addition to the acquisition of Bestform Inc. in December 1998, the apparel behemoth in the past year bought service-apparel company Penn State Textiles, took a majority stake in VF Japan and bought its former Lee and Wrangler licensee in Turkey.
The unglamorous field of workwear has been a recent focus of VF acquisitions. In early March, the company’s VF Workwear Inc. subsidiary signed a definitive agreement to acquire all the capital stock of Horace Small Holdings Corp. of Delaware for $57 million in cash. Later that month, VF purchased privately held Todd Uniform Inc., St. Louis, for an undisclosed sum. The Todd operation reportedly generates annual sales of $40 million.
McDonald said VF planned to spend up to $200 million on new acquisitions in workwear in 1999. Earlier this year, VF added two powerhouse licensees to its portfolio of megabrands: a Nike line of sports bras and related active separates, and Tommy Hilfiger innerwear.
Commenting on whether Fruit of the Loom or Maidenform was targeted for takeover, McDonald said, “We are focused on jeanswear, intimate apparel, workwear and daypacks as far as acquisitions are concerned. One of those two companies mentioned falls into one of those categories.”
Since taking the helm in 1994, McDonald has consistently kept in place the keys to VF’s success: multiple brands, consumer focus, value and flow replenishment. Under his command, VF has been strongly positioned on the international fast track as a “more information and marketing-driven company,” while still retaining its manufacturing and distribution clout.
In the past two years, McDonald has implemented what he calls a “consumerization” program, “to do what we do best: respond effectively to our consumers and customers.” The program focuses on creating strong brands and targeting them to specific consumer segments. As an example, VF research revealed 11 segments of jeans buyers; VF is positioning each jeans brand to a particular style, fabric and fit preference, and at the same time minimizing competition among the brands.
McDonald is credited with creating coalitions in the company’s infrastructure; various divisions work together to share information, create new strengths and cut operational costs. As an example, proprietary information regarding foundations at the Vanity fair Intimates coalition is being used in the newly licensed line of Nike sports bras and for Jantzen swimwear.
Now VF is in league with Wal-Mart to manufacture and market its Vassarette bra label to Wal-Mart International stores in Europe and Latin America. A major launch is slated for later this this year at Wal-Mart’s first venture in Germany.
VF’s core jeanswear brands are Lee and Wrangler; in intimate apparel, they are Vanity Fair and Vassarette. The company also has a stable of European innerwear labels in its VF International division, including Lou, Bolero, Gemma, Intima Cherry, Belcor, Carina and Variance.
The Warnaco Group, under Wachner’s leadership, has taken an aggressive approach to mergers and acquisitions. Since leading a leveraged buyout of Warnaco with a group of investors in 1986, Wachner has acquired and managed a growing arsenal of intimate apparel brands with the precision of a surgeon and the patience of a chess player.
The intimate apparel industry may be mature, but Warnaco has been largely responsible for consolidating a stable of national brands under one corporate umbrella through its acquisition-hungry strategy.
With its powerful Calvin Klein Underwear brand, it initiated the megabrand frenzy that is taking over innerwear departments, which are increasingly becoming congested with a barrage of in-store shops with prominent names.
But as industry executives generally observe, the innerwear sector is approaching a saturation point of big-name brands, and retailers face the challenge of finding the real estate to house them.
Bras apparently are not the only cash cow Warnaco expects to beef up profits. In a move that signaled the firm’s shift to diversification — and which substantially fortified Warnaco’s franchise of Calvin Klein products — Warnaco acquired Designer Holdings Ltd., the maker of Calvin Klein Jeans, in December 1997 in a deal worth about $354 million. The pact for U.S. distribution gave Warnaco one-third of the $2.5 billion worldwide Calvin Klein empire.
Since then, Warnaco has taken control of the Canadian distribution rights to Calvin Klein jeans and bought back the CK Kids jeanswear name for boys, girls and toddlers for distribution in the U.S. Mexico and South and Central America.
Wachner has predicted Calvin Klein denim [wholesale] sales will reach $600 million in 1999, compared with last year’s $500 million. The goal this year will be to expand the number of Calvin Klein Jeans in-store shops for men, women and children to 900. There currently are more than 300.
Warnaco further diversified its portfolio when it acquired 70 percent of Penhaligon, the high-end British toiletries firm, in March. Currently, six freestanding stores in the U.K. and several leased shops in the U.S. and the UK generate sales of about $16 million.
Warnaco’s high-pressure acquisitions posture took shape in 1996, when it made three major purchases: GJM, a $100 million private label maker of sleepwear based in Hong Kong, which does Calvin Klein sleepwear; Lejaby-Euralis, a $120 million manufacturer of upscale Lejaby bras and swimwear from France, and Body Slimmers Inc., a shapewear specialist that has since generated annual revenues of more than $9 million.
Warnaco’s innerwear gem is Calvin Klein Underwear for men and women and men’s accessories. Warnaco bought Klein’s underwear and accessories businesses in 1994 from Calvin Klein Inc. in a deal worth $62.5 million.
Wachner noted earlier this month that she planned to open 32 freestanding Calvin Klein Underwear stores in Asia this year.
Warnaco’s stockpile of intimate apparel brands includes its core Warner’s and Olga bra labels; Bodyslimmers by Nancy Ganz; Van Raalte, which is distributed exclusively to Sears, and two licensees — Fruit of the Loom sports bras and related daywear, and Weight Watchers shapers, both are aimed at major discounters. Warnaco also holds the license for men’s wear and casual sportswear under the Chaps by Ralph Lauren mark.
Kellwood Co. has evolved from primarily a private label maker for Sears into a strong brand manager with lines across many categories, managing companies as small as the bridge-priced David Dart Collection, with sales of $40 million last year, to the $700 million Sag Harbor brand. The company has made acquisitions an integral part of its corporate strategy since buying Koret of California and Fritzi.
Hal Upbin, president and ceo, said Kellwood’s acquisition strategy began in the mid-Eighties and focused on mid-size, marketing-driven companies until last year, when it acquired Koret, a moderate sportswear house, and Fritzi, which makes junior and girls’ apparel, representing a combined $400 million in revenue flow.
“Now we’re in a phase where we’d like to look at consequential acquisitions in men’s wear or accessories,” Upbin said, noting that a meaningful acquisition would be a company with volume of more than $100 million.
“Our core strength is women’s moderate to popular-price sportswear, and with $2.3 billion or $2.4 billion of revenue flow, that represents more than half,” Upbin said. “It’s very important to have diversification because we’re in the fashion business, not a commodity business.”
When a category is soft, such as careerwear, others might be performing well. Having a diversified portfolio of markets helps make the company more flexible and nimble so it can move in and out of categories, distribution channels and product lines as need be.
“Diversity is absolutely the greatest strength Kellwood has within the framework of our apparel company,” Upbin said. “This business environment is very soft. The apparel industry grows 3 to 4 percent a year, but we as a public company need to grow 8 to 10 percent to satisfy our shareholders. We are a soft goods consumer product company, but if you think out of the box, you can grow Kellwood into nonapparel industries.”
Kellwood’s recreation division, American Recreation Products, which makes camping gear, has sales of about $160 million, Upbin said.
Comparing Kellwood with other acquisition-minded vendors like Jones and Liz Claiborne, Upbin said the major difference between them was that Jones and Claiborne were branded companies. While Kellwood might dominate the moderate market with the Sag Harbor and Koret divisions, Upbin added, “We don’t consider ourselves to be a branded company.”
Sara Lee Corp. has a fleet of brands and products that makes it a perfect example of a diversified company aiming to satisfy the tastes and desires of an evolving global marketplace.
Sara Lee chairman and ceo John H. Bryan summed it up in an opening statement in the company’s 1998 annual report: “In a time when so many new markets have opened, and there is such as rapid advance in the consolidation of business positions throughout the world, Sara Lee’s considerable portfolio of leading brands gives us extraordinary growth opportunities.”
Sara Lee has followed through in the last few years with a broadly based cast of acquisitions and licensing agreements to satisfy consumers across the globe.
The diversity of acquisitions is evident in the company’s 1998 report. In the apparel field, Walt Disney Co. characters have been exclusively licensed for the Branded Apparel division’s Showtoons children’s underwear, and Strouse, Adler Co., a 137-year-old maker of shapewear and specialty bras, was acquired to enhance Sara Lee Intimates’ plunge into the growing shapewear market.
Following the Strouse, Adler acquisition in 1998, the company was renamed Specialty Intimates Inc. Sara Lee noted that in 1998, the company spent $393 million to acquire a number of small and medium-size businesses, the largest of which was the Australian-based direct selling company, Nutri-Metics International.
The purchase has “significantly” expanded the geographic reach of Sara Lee’s Direct Selling business, which includes brands such as Hanes, Hanes Her Way and L’eggs hosiery and underwear.
In the year ended June 27, 1998, wholesale sales of branded apparel — intimate apparel, hosiery, accessories and knit products — accounted for $7.3 billion of Sara Lee’s overall annual revenues of $20 billion.
Sara Lee began its heavy acquisition activity in the innerwear and hosiery fields in 1991, after it acquired Playtex Apparel, a $480 million bra company. A succession of other acquisitions quickly followed, including Pretty Polly, a British legwear label; Dim, a French legwear and intimate apparel brand; three Spanish underwear labels, Rinbros, Abanderado and Princesa; Wonderbra, and Lovable Italy.
In 1998, Sara Lee bought the domestic trademarks of The Lovable Co. for $9.5 million, and took over the licensing rights for Canada. The trademarks include the Lovable, Celebrity and Trendsetters names in bras. In 1996, Sara Lee acquired the Lovable trademark for Italy.
This international list of brands joined Bali, a core bra brand that’s been distributed domestically, as well as highly successful megabrands that were created in-house, Hanes Her Way and Just My Size. The momentum has been kept up by the company’s ability to create families of sub-brands that enhance the validity of its core products, such as the Hanes Sport brands of active-inspired bras and bottoms, Secrets by Playtex control products and Bali’s Barelythere seamless panties and bras of microfiber.
The company introduced its first big-name designer license in innerwear in 1998 — Ralph Lauren Intimates.
Now, after a long haul of innerwear acquisitions, Sara Lee appears to be setting its sights on evolving from a vertically integrated company to a nonvertical enterprise, streamlining operating processes and improving both operating margins and returns on assets. The results include a record operating cash flow of $1.9 billion.
After The Leslie Fay Co. emerged from a four-year bankruptcy in 1997, the company was able to entertain a multitude of offers from smaller firms looking to be bought.
Last November, Leslie Fay bought The Warren Group, which bringing into its fold an established business with social occasion dresses at better prices. Warren diversified Leslie Fay’s portfolio, which was concentrated on moderate-price dresses and sportswear.
The deal added about $40 million to Leslie Fay’s 1998 revenues, adding to its annual sales of $125 million. That deal gave the Warren company diversity in sourcing, while alleviating back-office overhead expenses.
Pomerantz said as a public company growth could be achieved in today’s market by expanding the firm’s existing brands into new categories or acquiring other companies or brands that complement its own. In June, Leslie Fay is launching an evening division to help build volume, based on expectations of a strong social occasion business for the millennium.
“If you have a nice position with stores, you can introduce new products more easily than a startup could,” Pomerantz said. “There will be a lot more acquisitions going on in the manufacturing side.”
It is best to run the acquisitions as independent divisions, Pomerantz said, applying the best merchandising and marketing practices of each company while combining back-office distribution and manufacturing.
In the fashion business today, Pomerantz said, “you have to build sales volume, you have to be important and you have to have the goal of being first or second in the marketplace. I don’t understand how anybody would want to be in business today the way this business is going. There’s maybe 30 to 32 accounts left to sell.”
Kasper ASL bought the Anne Klein brand and trademarks from Takihyo Co. in July for $65 million. Kasper’s executives have approached their new venture with the attitude that mergers have come about because vendors need to pool resources so they can better operate on a playing field dominated by huge retailers.
“There are going to be more acquisitions in the manufacturing base,” said Gregg Marks, president of Kasper. “Then the big guys that attend to their products will continue to grow. If you’re not going to be a megabrand, then you’re going to be squeezed out. If you’re not really important, retailers aren’t going to spend time with you.”
By purchasing Anne Klein, Kasper acquired a company that markets similar career apparel, but at a higher price. Kasper’s main business is in the moderate to better price range; Anne Klein’s is better to bridge.
“We’re going to make it a megabrand,” Marks said.
Kasper wanted to get into the sportswear category not only to diversify its offerings, but to secure future growth as a public company.
Since acquiring Jones Apparel Group in 1975 from W.R. Grace & Co., Sidney Kimmel built the firm into a powerhouse in the better market.
In the past decade, the firm has been one of the most active acquirers in the industry, starting with the purchase of the Evan-Picone label in 1993. In October 1998, Jones’s purchase of Sun Apparel brought together its manufacturing expertise with a brand the company was already making in another category.
The purchase brought with it Polo Jeans Co. Jones was already making the Lauren by Ralph Lauren sportswear line under license. In yet another development, Jones announced in February it had bought the Todd Oldham trademark, and in March it acquired Nine West.
With sales of $1.7 billion, Jones now makes an array of products, including sportswear, jeans, suits, dresses and men’s wear under brands like Jones New York, Evan-Picone, Rena Rowen and licenses Lauren by Ralph Lauren, Ralph by Ralph Lauren and Polo Jeans Co.
The advantages of becoming part of a larger company, according to Jones, have become the industry refrain: sourcing and marketing abilities, economies of scale and negotiating power with raw materials suppliers and retailers.
Liz Claiborne, which for much of its 23-year history focused on marketing a signature line of better-price career clothes, now offers a wide range of product lines, from its Russ mass line and Elizabeth large-size unit to its homegrown Dana Buchman bridge label and licensed DKNY jeans and activewear division.
The core labels — Liz Claiborne Career, Lizsport, Lizwear and Liz & Co. — accounted for about half of the $2.54 billion in sales last year. The company made its first acquisition in 1992, when it acquired the labels Crazy Horse, Russ and Villager. It was a major move, since it marked the company’s first plunge into the moderate arena. With no clear-cut strategy in place, however, the business floundered for a couple of years.
Under the stewardship of the chairman and chief executive officer Paul R. Charron, who took the reigns from Jerome A. Chazen in 1995, the company restructured the labels and folded them into a new division called Special Markets.
In the past two years the company has acknowledged limited growth opportunities in its core brands and stepped up the pace to add new labels to its stable, either through licensing ventures or acquisitions.
In December 1997, Liz Claiborne signed a licensing agreement with DKNY to produce jeans and activewear. So far, the relationship has proven to be a success; the men’s and women’s DKNY jeans generated $60 million last year. The DKNY active and jeans business should do about $100 million this year. Claiborne plans to launch a junior sportswear line under the DKNY label for 2000.
Such a partnership with DKNY has enabled Claiborne to capture a younger audience. Claiborne attracts a 35-plus customer, while DKNY attracts customers as young as in their early 20s.
In January, Claiborne acquired an 84.5 percent stake in Segrets Inc., including its main $60 million Sigrid Olsen label, as part of its plan to purchase emerging businesses that cater to better customers. Sigrid Olsen has a strong specialty store base, which helps Claiborne expand beyond its traditional department store channel of distribution. Claiborne plans to make Segrets into a $200 million company in the next five years. In July, Claiborne bought a minority stake in Kenneth Cole Productions and was reported to be eyeing Laundry, the California contemporary firm.
But whether it’s Claiborne or Kellwood, Prada or Pinault, the bottom line is clear: The big will get bigger. And the only question seems to be when exactly the next blockbuster deal will hit the headlines.