MOSSIMO’S WILD RIDE: A ROCKET TO THE STARS, A PLUNGE BACK TO EARTH

Byline: Kristi Ellis, Los Angeles / Jennifer Brady, New York

LOS ANGELES — Only last June, Mossimo Giannulli’s brand new stock was flying high, trading in the $50s. He was even touted by one financial analyst as the next Calvin Klein.
But in recent weeks, Wall Street appears to have fallen out of love.
Mossimo Inc.’s stock has plummeted, now trading in the $15 range, and many are wondering how the young California designer will endure such an unforgiving — and demanding — financial community.
The paper loss to Giannulli, chairman and chief executive officer, is staggering: The designer owns about 11 million shares, or 73.3 percent of the company’s stock, and the difference between the $50 high and Tuesday’s price of $15.63 represents a loss to Giannulli of about $380 million.
Giannulli expressed frustration over the rapid turn of events, but he and his chief financial officer, Tony Cherbak, say that while the company may have tried to do too much too soon, it’s still a solid brand with strong growth potential.
“When you have a little blip with a high profile, high-flying company, the minute something falls off track, which is not symptomatic of the company’s business, you get a lot of skeptics,” said Cherbak.
“The slightest misstep by any apparel company that trades in high multiples like we do, causes the market to lose faith in you,” he added.
After going public last February at $18 a share, the stock shot as high as 50 1/8 in June and closed Tuesday at 15 5/8, down 1/8.
Last Friday, it sank 5 3/5 points to 16 1/8, following the release of its disappointing third-quarter results that reflected unusually high production development costs. Also taking its toll on the stock was a conference call with analysts in which Mossimo executives said the company would sharply increase marketing and retail promotions expenditures next year.
Both underwriters for Mossimo’s IPO, Merrill Lynch & Co. and Smith Barney Inc., downgraded their ratings last week, amid concerns that costs would dent Mossimo’s bottom line in 1997.
Just last August, an article in Barron’s quoted one analyst, Scott Schoelzel of Janus Capital, a fund manager in Denver, saying, “I was really impressed with how focussed he [Giannulli] is on the business. He’s looking at products that could be big brand names.” In the article, Schoelzel surmised that Mossimo could even be the next Calvin Klein.
Mossimo has blamed its lower earnings on “unusually high product development costs,” related to the launch of a fall women’s sportswear line and an expanded fall men’s sportswear line.
Analysts have criticized the firm’s aggressive expansion plans, claiming that Tommy Hilfiger and Nautica have been more successful by licensing out their lines and timing launches further apart.
In the quarter ended Sept. 30, Mossimo spent $1.3 million in marketing, nearly three times the $455,000 spent a year ago. Overall operating costs ran up 47 percent to $7.2 million, from $3.8 million.
It was a “misstep” that will have a residual effect of another $600,000 charge in the fourth quarter, said Cherbak, who blamed the increase in costs on excessive sampling of the fall line.
In a telephone interview Monday, Giannulli defended his expansion decisions and stressed that his company is still profitable.
“We stubbed our toe for the quarter, but the numbers show that we are still a very profitable company,” Giannulli said. “It’s not as if we aren’t making tons of money — we are,” he added.
He said that he told shareholders three weeks ago that earnings would be between 14 and 16 cents per share due to the higher developmental costs.
“It is frustrating to me personally because we are successful, and I don’t want to let down the shareholders or the analysts because I’m not hitting the projected numbers, but I guess that is business,” Giannulli said.
“Ultimately we will hit the numbers,” he added.
Giannulli maintained that his company, which made its name in hip California surfwear, is having the best sell-throughs it has ever had while its new women’s sportswear business has been a success.
According to Cherbak, the volume on the women’s sportswear line has exceeded the original $5 million wholesale projection. Through the third quarter, the line has done $11.4 million in business, Cherbak said.
“I think on a long-term basis, not quarter by quarter,” Giannulli said. “My decisions may not be in the best interest in a particular quarter, but two years from now, in the long term, they will be in line, and we will be having a different conversation,” he added.
He said that he had not made a mistake by expanding his men’s wear line while launching a women’s sportswear line but conceded that “we overdeveloped,” pointing to the high developmental and marketing costs.
“When a company grows at the clip that ours has, everything isn’t always perfect,” he acknowledged, adding that the company has made adjustments in the sourcing of samples, which attributed to the higher costs.
Cherbak said that the company sampled the entire merchandise lines instead of narrowing the focus before production of the samples.
He said that the firm cut 40 percent of the men’s sku’s and 25 percent of the women’s sku’s after the samples were made and swallowed the sampling costs.
To correct the problems, the company brought in Laura Landis as vice president of merchandising 3 1/2 months ago. Landis was with Banana Republic for seven years. Landis has cut out the waste by negotiating complete sampling packages, sourcing one sample garment with one place as opposed to the company’s practice of sampling separate pieces to a variety of shops, which drove up prices, Cherbak said.
“By the first quarter of ’97, we should be back to normal,” Cherbak said. “We will continue to work the sample areas hard and keep the costs as neutral as possible,” he added.
Brenda Gall, analyst at Merrill Lynch, in a telephone interview said that the downturn in stock price reflects the company’s plan to increase spending “in order to secure the most attractive in-store shop locations in competition with key apparel producers.”
Gall cut her intermediate term rating to “neutral” from “accumulate” and lowered estimates to 86 cents for 1996 from a range of 92 to 95 cents against 89 cents a year earlier.
She added, “I still believe they are a growth company; they are going through some growing pains on the cost side. I think the market will take a wait and see attitude.” Gall is maintaining her long-term buy rating on the stock.
In her research note, Gall said that the commitment to Mossimo’s men’s and women’s sportswear lines by retailers such as Bloomingdale’s and Macy’s “continues to be very encouraging.” She added, “The new women’s line is now in over 1,400 doors and is exceeding our upwardly revised volume expectations.”
Analysts project that Mossimo’s women’s wear sales could reach $30 million next year.
Smith Barney analyst Faye Landes downgraded Mossimo to “neutral” from “outperform,” and cut her full-year 1997 estimate to $1.15 a share from $1.25.
Landes said in a report she is now forecasting selling, general and administrative expenses at 23.5 percent of sales in 1997, much higher that her original forecast of 20 percent. This reflects larger than expected expenditures in personnel and for expansion of in-store shops to 150 by the end of next year.
Analysts said the firm currently has 68 shops, consisting of 55 men’s shops and 13 women’s.
Although Landes expects the steps the company will take will be beneficial over the long term, the fact that expenses will be “much higher than previously expected is likely to depress Mossimo’s performance both today and for some time,” she said.
At retail, the new women’s line has it share of supporters, despite some early glitches.
“It [the women’s line] hasn’t been meeting our expectations,” said a buyer for Dillards. She said she increased the number of doors carrying the women’s line from four in April to 18 for fall. “But we’ve experienced a lot of shipping problems. If I don’t have stock I can’t make money.”
Pieces of the basic line, such as the hipster jeans, are selling well but sales of classic and slim jeans are slow.
“The fashion was too high-priced for fall, but for my holiday deliveries, prices were more understandable.” Overall, she said she’s optimistic, “as long as they ship the goods to me.”
Liberty House, based in Honolulu, carries the women’s sportswear line in 10 doors and plans to add five more smaller, resort stores.
“It has a strong following in the islands because it started more as a men’s surfwear line and when it went into juniors, everyone knew who Mossimo was,” said Dana Higuchi, junior denim sportswear buyer. “It’s easy to wear and very fashionable.” Higuchi said the line is one of the top three vendors she has in her denim sportswear area.”
As reported, third-quarter profits tumbled 48.9 percent to $2.3 million, or 15 cents a share, hurt by hefty product development costs for its fall lines. In the year-ago period, adjusted for its IPO, the company earned $4.5 million, or 21 cents.
Sales in the third quarter shot up 69.7 percent to $31.9 million from $18.8 million, but gross margins sank to 39 percent of sales from 44 percent.
Giannulli noted that the company is not pulling back, rather it is actively pursuing other areas of expansion, including licensing agreements.
The firm has signed two licensing agreements for men’s and women’s sportswear and has acquired the rights to establish stores in Greece and South Africa. The company has also signed agreements with the Zouboulidis Group to produce and distribute sportswear in Greece and Cyprus. The first collection for Spring ’97 is currently being shown for January and February shipping. Zouboulidis also represents Guess, Mexx and Max Mara in Greece and Cyprus.
The other agreement was signed with Meltz-Success (PTY) Ltd. for distribution of sportswear in Johannesburg, South Africa. The first collection will be available at leading South African retailers such as Edgars, Foschini and Stuttafords by June 1997.
In an earlier interview, Karen Ioli, vice president of licensing for Mossimo, said that the company plans to have its licensing program full-scale by fall 1997.
Ioli said it is planning to sign licensing agreements in four Asian countries, including Korea, Hong Kong, Singapore and Thailand by fall 1997. There are also plans to license shoes and fragrance.
While these deals are a good bet to boost Mossimo’s bottom line in the long term, time may not be on the company’s side, as an impatient Wall Street keeps close tabs, quarter by quarter.

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