ANALYSTS BANK ON BIG BRANDS IN ’96
Byline: Jennifer Brady
NEW YORK — After a year plagued by hefty charges reflecting poor consumer demand and excess inventories, Wall Street apparel analysts remain wary about 1996, but expect big brands to remain hot.
“The outlook for 1996 is cautious,” said Carol Pope, analyst at J.P. Morgan Securities. “Certainly, consumer spending on apparel is not expected to increase significantly.”
Pope added, “From a cost perspective, we see progress being made…[but] in terms of demand, the difficult retail environment will limit sales.”
In the fourth quarter alone, a survey of 30 apparel firms showed a 48 percent drop in profits while sales moved up only 3.1 percent. For the year, the firms were able to produce a 4.3 percent gain in profits while sales rose 6.2 percent.
However, some branded apparel makers with strong established positioning prospered. Among the select group, Jones Apparel Group and Warnaco Group are expected to grow in 1996, according to the analysts. Also regaining star status is Liz Claiborne, which after some difficult years gave solid evidence of a turnaround last year.
These firms are candidates to gain market share through product extensions, licensing deals or acquisitions. High-end producers, including St. John Knits, are predicted to stay on top. Faye Landes, analyst at Smith Barney, noted Gucci’s public offering “has indicated that the investor has bought into the idea that a high-end company can do very well.”
Pope expects department store suppliers such as Jones, Liz Claiborne and Warnaco to continue to do well in 1996. “These labels are outperforming the overall market, which is expected to see only modest growth.” Todd Slater, analyst at UBS Securities, said, “Manufacturers that are aggressive and opportunistic, with strong cash flow for acquisitions, will outperform the others.” UBS Securities Slater noted that while the strong brands fared well in the fourth quarter, some of the secondary and tertiary brands “lost some momentum.” He cited Norton McNaughton, where profits sank 37 percent in the fourth quarter.
Norton McNaughton is expected to lose about 1 to 2 cents a share in the first quarter against 17 cents earned last year. The commodity business, including makers of T-shirts, jeans and dress shirts, “continues to get hammered,” Slater said. Kellwood Corp., with its struggling Smart Shirt business, posted a $2 million loss in its latest quarter. However, basic apparel makers such as Fruit of The Loom and VF Corp., which logged huge restructuring charges this year, should benefit from lower costs.
Slater said the year’s winners would include Warnaco and Authentic Fitness Inc., which are able to expand their margins and at the same time increase their top line.
Although several activewear firms are expected to keep struggling, the summer Olympics may pull firms such as Russell Corp. and Tultex Corp. out of the doldrums, and accelerate growth at Authentic Fitness, which has an Olympic license and a strong lineup of swimwear brands.
Analysts agreed the Olympics would boost demand for T-shirts and sweatshirts. Tultex is expected to earn 60 cents this year versus 15 cents before special items in 1995; Russell, $1.92 a share for the year versus $1.38.
The licensed sports apparel business appears to be recovering, with all professional sports leagues in session, analysts said. Starter Corp. is expected to earn 34 cents a share in 1996 versus 5 cents. Jennifer Black Groves, analyst at Black & Co., Portland, Ore. noted both Liz Claiborne and Jones have a “great product” and are in “an excellent position going forward.”
She termed Claiborne’s recently announced plans to streamline management “very significant,” adding that the move bodes well for the future of the company. Several analysts suggested that Claiborne, with an ample cash reserve, has the ability to pursue acquisitions.
Analysts expect Liz Claiborne to earn 44 cents a share in its first quarter, up from 37 cents last year. For the full year, they look for $1.95 a share against $1.69. Jones Apparel is creating new dimensions with the Lauren by Ralph Lauren women’s collection it plans to roll out initially in 250 retail doors, with shipments starting in July for fall and holiday.
The company is expanding its offerings with Jones Jeans, a denim line for larger sizes that includes five-pocket jeans. That line will be launched in the second half.
Analysts estimate Jones will earn 73-74 cents a share in the first quarter against 64 cents a year ago. In 1996, they look for $2.79-$2.80 a share in 1996 against $2.38 in 1995.
Warnaco will advance its position in sleepwear with its acquisition of GJM Industries. The intimate apparel maker is expected to be helped by “further globalization” of Calvin Klein underwear, according to Pope. She estimates Warnaco will earn $1.54 a share in 1996 against $1.26.
Black & Co.’s Groves expects momentum at St. John Knits to keep up in 1996, led by strong performances in its casual apparel offerings and vigorous sales at the company’s boutiques. St. John, which will report earnings this week for its first quarter ended Jan. 28 and therefore is not included in the accompanying chart, is expected to earn 60 cents verses 48 cents last year. For the full year, analysts expect St. John to earn $2.91 a share against $2.38.
Allison Malkin, analyst at Dillon Read, said, “Branded apparel companies will continue to do well…specifically those companies who have exposure to the casual segment.” Malkin cited opportunities at some other relatively small companies such as Marisa Christina Inc., which last month acquired Adrienne Vittadini’s wholesale and licensing operations. Marisa Christina is expected to earn 73 cents in the first quarter, up from 64 cents a year ago, and $1.40 a share for the year versus $1.20.
Donnkenny will continue to reap the benefits of its two acquisitions, Beldoch and Oak Hill Sportswear. Malkin noted the company’s Mickey & Co. brand is still a shining performer at J.C. Penney. Donnkenny is expected to earn 17 to 19 cents a share in the first quarter versus 15 cents a year ago. Another contender for 1996 is Sirena Apparel, maker of Ann Klein and other designer swimwear. Although Sirena’s third quarter could reflect some weakness due to the absence of a swimwear market in January, Malkin said, “In the long term, they are poised to gain market share through acquisitions and licensing opportunities.”
Malkin pointed out, “For those smaller companies that have faltered in the past and that don’t have as much floor space…it will be harder to turn things around.”
— Fairchild News Service