STREET TAKES NEW TONE ON VENDORS
Byline: Jennifer Weitzman
NEW YORK — Even in light of the technology sector fallout, Wall Street still views the big-volume moderate and better apparel firms as Rodney Dangerfields: They get no respect, despite their delivery.
While some moderate and better apparel companies — Liz Claiborne, Jones Apparel Group, Tommy Hilfiger and Quiksilver, along with more upscale Polo Ralph Lauren Corp. and Kenneth Cole Productions — have the potential to become Wall Street darlings, most will continue to be passed over by institutional investors. The likelihood that the second half of 2001 will be economically better than the first, especially if a tax cut and lower fuel prices lighten consumers’ burdens, could brighten their prospects somewhat, as hinted by recent stock advances by several firms.
Industry observers and executives agree that apparel vendors are out of favor with investors. They said that only when the gurus of Wall Street become enthralled with a certain sector will that segment’s stocks flourish. Until then, most apparel offerings will languish until they are looked upon as important players that show consistent profitability.
“Seventh Avenue may rule fashion, but it is Wall Street that rules where you should put your money,” said apparel consultant Emanuel Weintraub. “Love starts with chemistry, and there is no chemistry about someone selling skirts, blouses and underwear. Dot-coms had that.”
But Wall Street will still hold a special place for those companies that show relatively stable growth, including apparel companies. In spite of a holiday season marked by aggressive promotional activity, many retailers are heading into the new year with clean inventories, giving some investors a reason to take a second glance at apparel.
Credit Suisse First Boston’s Dennis Rosenberg said he has issued bullish reports on the apparel sector since November because he believes that the branded apparel industry is well positioned for growth in 2001.
Retailers are planning conservatively this year due to the inventory issues they faced last year, which stemmed from weak sales that began in the spring and continued through the fall, Rosenberg said.
Others said that more good news for the sector may come from the easing of interest rates and the possibility of a tax cut, which would put more money into consumers’ wallets.
On Jan. 3., stocks received some much-sought-after relief when the Federal Reserve Bank slashed interest rates by a half-point, to 6 percent.
Larry Leeds of Buckingham Capital Management Inc. said that, historically, “apparel companies recover vigorously within three to four months after interest rates peak.” He added that when interest rates stop rising, consumer distress levels fall and consumers are more inclined to make purchases.
“We are in an environment now where interest rates are coming down to stimulate consumer confidence,” said Jennifer Black, an analyst at Wells Fargo Van Kasper. In addition, she said that investors are now looking at new places to put their money because of the increasingly unstable technology stocks.
For instance, Liz Claiborne announced Monday that it expected to see an 11 percent sales increase in its fourth quarter of 2000, resulting in the same sales increase for the year. With roughly a 15 percent increase in sales for the year, the manufacturer also expects to achieve fourth-quarter and full-year earnings per share in line with company and Wall Street expectations.
Paul R. Charron, chairman and chief executive officer, said in a statement: “This performance validates our multibrand, multichannel diversification strategy.”
Wall Street rewards such philosophies. Claiborne has seen its share price grow about 50 percent since last February, when it recorded a 52-week low of $30.93. It now trades at about $46.06, not far from its 52-week high of $48.31, recorded April 25.
Among the other mainstream firms cited by analysts as having strong potential, Hilfiger’s stock closed Tuesday at $14.13, a 123.9 percent increase from its $6.31 low on June 22; Jones closed at $38.69, a 92.2 percent increase from its 52-week low on Jan. 31 of $20.13; Polo closed at $26, a 103.9 percent jump from its 52-week low on May 25 of $12.75; and Quiksilver ended the day at $23.31, a 152 percent gain from its 52-week low of $9.25 reached Feb. 18.
Many analysts contend that the more visible and diversified a company is, the more alluring it is to Wall Street. Andrew Jassin, managing partner with the Jassin O’Rourke Group, an industry consulting firm, said companies that are growing through acquisitions should be entitled to sell at higher multiples on Wall Street because they are likely to continue to grow at a high rate.
Many analysts praised companies with diversified portfolios such as Claiborne, Jones New York, VF Corp. and Kellwood.
However, apparel companies have had problems because of their relationship with retailers. Unlike suppliers in other industries, apparel vendors are expected to work closely with the retailers they serve, even after delivery, which often creates the need for artificial support by making monetary demands such as chargebacks and markdowns.
“The [chargeback] penalty is the plague upon the supply side, since they cannot predict if they will need to cough up at the end of the season,” said Jassin, adding that investors are wary of this hidden cost.
Jassin believes that “apparel and fashion companies are never meant to be public companies.” He said that the seasonal fashion cycles, the time needed to produce goods, the short-term financial planning and the pressure on profit stemming from the discounts offered at the end of seasons can all test investors’ patience.
Wall Street typically prefers companies with predictable profitability, and thus high price-to-earnings ratios, Jassin said, adding that for a long time, apparel companies have had price earnings that were spread too thin.
Yet another strike against apparel vendors comes from the consolidation that has been occurring in the retail industry over the last 20 years. Todd Slater, analyst with Lazard Freres & Co., said apparel companies have in part lost favor on Wall Street because of the consolidation of power at the department store level, from which they derive the lion’s share of their business.
He said investors place greater emphasis and higher multiples on vertically integrated brands, like American Eagle Outfitters and the Gap, because these companies control their destiny and have a higher return on capital than do brands that are resold through other retailers.
“Apparel companies are seen as having a weaker margin model because they are not in control of their destiny,” Slater said. “Their products are resold and their market is not growing, so you have an unstable market.”
Analysts said luxury brands like LVMH and Gucci enjoy higher multiples than do the moderate and better brands because investors buy into their business plans, which call for increased exclusivity, higher margins and limited distribution.
Bob Salem, vice president of corporate marketing for Leslie Fay Co., said apparel companies can be considered among the most volatile kind of investing because fashion is based on change and uncertainty — the enemies of investors looking for stability.
“It’s so volatile because one never knows if it will be a hit,” he said. “Apparel companies aren’t getting Wall Street’s attention because most of them have shown volatility in their quarterly and yearly earnings.”
Still, some say that a change may be coming, as many apparel companies are endearing themselves to investors by combining solid management teams with business models that work. In addition, a number of companies are gearing up to consolidate this year and become more lean and efficient in an effort to improve profit margins.
Weintraub said he blames the irrationality of the stock community for the ongoing undervaluation of apparel companies.
“Apparel and retail companies are not getting the accolades they should [be receiving] because Wall Street says this is not a popular sector,” he said.
Salem believes Leslie Fay is a sound investment because of its “diversified portfolio.” He said the manufacturer has made strategic acquisitions over the past three years, ranging from a better dress division in David Warren, a contemporary designer collection in Cynthia Steffe and the license to produce better dresses for Liz Claiborne.
Still, Leslie Fay has had its share of financial troubles. Financial fraud overwhelmed the company in the early Nineties and forced it into bankruptcy protection in 1993. On Jan. 16, the company’s stock price hit a new 52-week low of $2.69, and earnings at Leslie Fay all but evaporated in the first half of the year, falling 36 percent to $3.4 million, or 63 cents a share, against $5.2 million, or 84 cents a share, in the year-ago period, as markdowns took their toll.
Last week, the company saw its stock improve 41 cents to $3.16 when it announced that the Three Cities Funds firm would purchase the rest of its outstanding shares. The company reached a new 52-week low Jan. 16, closing at $2.68. On Tuesday, the company improved 17.9 percent, to close at $3.16.
A spokeswoman with VF Corp., a moderate apparel vendor with labels such as Wrangler and Gitano, said the Greensboro, N.C.-based firm’s stock has started to move up over the past several weeks.
Companies like VF are winning back investors’ favor, she said, because they are moving back to companies with real brands, earnings and businesses.
“We are expecting earnings to grow 8 to 10 percent in 2001,” she said.
VF’s stock price hit new 52-week high of $36.93 on Jan. 8. It is up roughly 50 percent since its $20.93 52-week low reached in March. On Tuesday, the company closed at $33.91
Peter Boneparth, ceo of Norton McNaughton, said Wall Street rewards companies that have predictable profits, not hot fashion houses that have wild swings in their fortunes.
“Investors are just beginning to understand that the apparel industry also presents an opportunity for investment,” Boneparth said. “Because of the consolidation that is under way, there is less competition and, therefore, more opportunity to create more consistent earnings.”
He also said that as companies become more diversified, they become less susceptible to wild swings in profits, thus earning Wall Street’s respect through their stability.
Last week, the company said its fourth-quarter profit rose almost 50 percent, mainly because of a better-than-expected performance in its Miss Erika women’s apparel division and improved profit margins.
The company is also up over 50 percent, trading at $13, from its 52-week low on March 31 of $7.8. It recorded its 52- week high of $17.13 on Aug. 28.