NEW YORK — As retailers continue to shrink vendor lists, Wall Street expects the big apparel firms to get still bigger in 1995 — and many smaller firms to be weeded out.
Analysts don’t predict annihilation for all smaller companies; those with a strong focus on a particular segment could do well. But for many, it’s going to get tougher and tougher.
Among the giants standing to gain are The Warnaco Group, Jones Apparel Group, Liz Claiborne, VF Corp., Levi Strauss & Co., Fruit of the Loom, Russell Corp. and Kellwood Corp.
“I just see more companies struggling and on the edge of extinction than ever before,” said Todd Slater, at UBS Securities. Slater said retail consolidation, such as the merger of Federated Department Stores and R.H. Macy Co. and the increasing power of giant retailers such as Wal-Mart Stores Inc. and Target, will make it hard for undercapitalized smaller firms to fill orders. “More mom-and-pops and some of the smaller players will be acquired or go away,” he said. Slater said this “bodes well for larger, more flexible, well capitalized players.”
Laurence Leeds Jr., at Buckingham Research, concurred.
“These pressures are driving the smaller people out of the business left and right. As the stores get bigger, they deal with fewer and fewer major resources. That plays into the hands of the few large public companies out there,” Leeds said.
Jennifer Black Groves, at Black & Co., based in Portland, Ore., agreed that many smaller firms “will go by the wayside” as retail consolidation accelerates. However, she and other analysts said some smaller firms that capitalize on niche markets can prosper.
“I think all apparel manufacturers have to have their places in the market or they’re gone,” said Groves. St. Johns Knits, Cygne Designs Inc. and Authentic Fitness Inc. are relatively smaller firms that are expected to do well.
In the fourth quarter, profits for 25 apparel firms slid 3.1 percent while sales grew 13.3 percent. In the year, the group’s earnings were flat, excluding a nonrecurring accounting charge at Levi Strauss Associates Inc., while sales gained 9.7 percent.
Leeds pointed out that although the overall apparel climate is difficult, many firms are grabbing market share and seeing strong growth.
“The business may be tough and there can be all these moans of doom, but certain companies are going to have record years,” Leeds said.
He expects record sales and earnings in 1995 from Warnaco, Jones Apparel, VF, Authentic Fitness, Tommy Hilfiger Corp., Nautica Enterprises and Norton McNaughton.
Jones Apparel is expected to earn $2.37 per share this year against $2.08. Slater said Jones’s casual business is “exploding.” The firm’s casualwear sales grew 48 percent in 1994 and should surge about 70 percent this year.
“Even though they get a lower gross on the casual segment of the business, they’re going to generate a substantial amount of dollars,” Groves said. She estimates Jones’s margins will improve slightly to 31.3 percent from 30.7 percent. Slater expects moderate gains from the more mature career business.
Groves expects Claiborne — more than three times the size of Jones, its nearest competitor — to be a “major beneficiary” of retail consolidation. She said Claiborne should earn $1.50 per share against $1.30, with notable improvement in the fourth quarter. This is a transition year for Claiborne, Groves said, when the company will focus on delivering quality products and restoring margins.
“Beginning in the first quarter, you’re going to see significant gross margin improvement on lower sales. That tells you that they’re going to give the consumer and the retailer what they want,” she said.
She estimates Claiborne’s gross margins will climb to 38.5 percent of sales in 1995 from 34.9 percent in 1994. She estimates sales will slip 4.1 percent, dragged down by a 9.5 percent decline in Claiborne’s core women’s better sportswear group and a 13 percent decline in its moderate sportswear group, including The Villager, Russ and Crazy Horse.
Groves noted the results from new hirings in the better sportswear area should be apparent in the fall.
UBS’s Slater expects Warnaco to earn $1.33 a share in 1995 against $1 and sees earnings growing at a 25 percent pace. “The intimate apparel business is about as hot as it gets,” Slater said, noting that backlog for Warner’s, Olga and Fruit of the Loom is up 45 percent. He said Warnaco’s acquisition of the Calvin Klein underwear business “is a grand slam.”
Besides its brand strength, Slater said, Warnaco benefits from wide distribution channels, selling through Victoria’s Secret, Avon Products, department stores and Wal-Mart.
Slater expects Kellwood to earn $1.40 a share in its year ending April 1995, down from $1.71. He said earnings were hurt by costs to reposition three underperforming divisions, but he said Kellwood’s core business is running ahead in the double digits.
He expects benefits from its numerous brands, strong sourcing capabilities and wide distribution channels that ranged from Wal-Mart to Bloomingdale’s.
He noted that one of its divisions, Halmode Apparel, making the Kathie Lee Gifford line for Wal-Mart, “could be a rocket ship for them.” Slater projects Kellwood’s earnings will bounce back to $2.30 a share for the year ended April 1996.
Edward F. Johnson, of Johnson Redbook Service, expects VF will earn $4.55 a share this year against $4.10 in 1994. He said strength in jeans in Europe and a pickup in the fleece market are offsetting weakness in the sports licensing business and a maturing jeans business in the U.S.
Strength in core T-shirts, underwear and fleece businesses should help offset weakness in sports licensing and higher cotton costs for Fruit of the Loom, Russell and Tultex, according to Johnson.
St. Johns Knits is expected to earn $2.14 to $2.20 a share in the year ending October 1995, against $1.82. Groves said St. Johns has set the standard for quality and focus on the customer, allowing it to command an overall gross margin of 51.2 percent in 1994.
Groves expects Cygne Designs Inc.’s earnings to surge 72 percent in 1995.
She said that through acquisitions, the private label manufacturer has vastly expanded its distribution channels and products. In particular, the company should benefit from its sales to Ann Taylor Stores and Victoria’s Secret, both of which are seeing strong growth and expansion, as well as from new accounts with Walt Disney, Dillard Department Stores, Target and The Broadway. “They’re going to have a ton of new business,” Groves said.
Redbook’s Johnson also expects Donnkenny to bounce back this year on the strength of strong demand for Mickey & Co. and core products after getting hurt last year by delivery problems.
He expects Donnkenny to earn $2.15 this year against $1.37 in 1993.
— Fairchild News Service