Byline: Vicki M. Young / David Moin / With contributions from Annmarie Dodd

NEW YORK — Nautica Enterprises Inc. on Tuesday reported solid fourth-quarter earnings results, and confirmed a story in these columns regarding its $45 million-plus purchase of the privately held Earl Jeans brand.
The company posted a 29.9 percent jump in earnings, to $13.1 million, or 39 cents a diluted share, for the quarter ended March 3, from $10.1 million, or 28 cents, in the year-ago period. Sales increased 10.6 percent, to $158.2 million from $143 million.
Nautica confirmed reports that it has entered into a definitive agreement to purchase Earl Jean Inc., a manufacturer and retailer of luxury women’s jeanswear and related apparel. The deal calls for Nautica to acquire the assets of Earl Jean Inc. for $45 million in cash and 1,122,271 new shares of common stock to be issued upon closing, expected in late April or early May. In addition, the agreement includes an “earn-out” provision, giving Ben and Suzanne Freiwald, who founded the company commonly referred to as Earl Jeans, the potential to earn up to $21 million over 10 years based on the achievement of certain growth levels.
Harvey Sanders, chairman, president and chief executive officer, told Wall Street analysts in a conference call Tuesday: “We will benefit from this transaction immediately.” He explained that Earl Jeans would operate as a wholly owned subsidiary of Nautica and will be run by the Freiwalds. Both have signed long-term employment contracts as part of the purchase agreement.
Upon the close of the deal, the Freiwalds will also own 3.4 percent of Nautica’s outstanding shares. Sanders told WWD that the couple would become either the third- or fourth-largest shareholder of Nautica stock.
Wayne Marino, Nautica’s chief financial officer, said during the call that Earl Jeans would add 1 to 2 cents a share to earnings in the current fiscal year, with higher levels in fiscal 2003 and beyond. The cfo also said that Nautica, overall, expects to realize in the current fiscal year topline growth of 15 to 18 percent and earnings-per-share growth between 8 and 10 percent. “Having executed our acquisitions strategy, we will now concentrate on developing each division,” Sanders said.
Nautica shares Tuesday were up 4.6 percent, to close at $16 in Nasdaq trading.
Sanders told WWD in a telephone interview that Nautica is not in the market for additional acquisitions. “We need to take some time off,” he said. Company executives disclosed during the conference call that a new footwear licensing agreement, replacing the one Nautica had with Genesco, might be announced within the next few months.
The ceo said that while the women’s jeans business was slightly below plan in the fourth quarter, current indicators show that the business is now “on trend” for the current fiscal year. Recent personnel changes, including the hiring of Sandra Campos as senior vice president of women’s and a new sales team operating outside of New York, have helped turn the business around, he said. In other areas of the business, men’s and women’s sleepwear continue to do well, with sales increasing in the double-digit range.
As for other potential hires, Sanders said: “I haven’t spoken to [Donna Karan International ceo] John Idol in three weeks.” Idol’s next move, now that LVMH Moet Hennessy Louis Vuitton’s purchase of DKI is set to close soon, has been a matter of widespread speculation in the markets, and Nautica has been mentioned frequently as a possible new home.
Sanders said that the retail environment has been “shaky,” with the women’s business performing better than men’s. “We’re guardedly optimistic. We feel good about our product for fall, and we’re all optimistic about back-to-school,” he said.
Nautica opened its 14,000-square-foot flagship store at Rockefeller Center on April 22. “We’ve only been open two days, but the response from the consumer has been excellent,” Sanders beamed. The apparel firm plans on advertising the store site next week in magazines and in surrounding bus shelters and telephone booths within a three-to-four block radius, according to the ceo.
The store, which is expected to generate first-year sales of $10 million to $12 million, will serve as a model for future freestanding Nautica stores, with the next one scheduled to open this May in Portofino, Italy. Men’s wear is housed on the main floor while the 4,000-square-foot mezzanine offers women’s Nautica Jeans, swimwear, sleepwear and a small collection of luxury sportswear designed by Nautica designer David Chu. The designer intends to create special men’s and women’s sportswear groupings for the store each season.
The design firm of Tsao & McKown and Chu paid homage to local landmark buildings, including the old Walter Reade Theatre, by incorporating the Art Deco front door and the floor slanted for theater seating casually into the retail space. Sailcloth has been draped at the theater stage’s edge to create two, billowy dressing rooms for Nautica Jeans.
In the quarter, Nautica’s wholesale revenues increased 15.6 percent, to $119.1 million, while revenues from the retail division were flat at $39.8 million. Comparable-store sales were down 11 percent, mostly from the lackluster outlet business. April retail outlet comps have trended better, up 3.7 percent, so far.
For the year, earnings dipped 0.1 percent, to $46.1 million, or $1.39 a diluted share, from $46.2 million, or $1.26. Sales rose 11.1 percent, to $627.7 million from $564.9 million.
Sanders said that the Nautica-Earl Jeans deal was in the works for the past couple of months. “The cultures of the two companies are much the same. We both believe in controlled growth, and [are] conservative in our management technique.”
The ceo added: “We hope to support them to the next level. There are opportunities internationally. There are opportunities with other product categories, and for retailing in key cities, on a limited basis.” Earl Jeans currently has only one store, in Los Angeles.
About 60 to 70 percent of the volume of the Earl Jeans collection is done from 12 to 20 stockkeeping units. Though still small in volume, the five-year-old Earl Jeans denim-based brand has an international reputation that’s known for its slim-fitting, low-waisted jeans, often with a Western feeling. Sales last year were $28.9 million, the company said, more than double the $13.8 million of 1999.
“This is a strategic acquisition for our corporation,” said Sanders, adding that it brings Nautica into a higher-priced, contemporary niche and furthers the firm’s distribution to upscale specialty stores, Sanders said. “We don’t look at this as an industry consolidation.” J.P. Morgan Chase was financial adviser to Nautica, while The Sage Group of Los Angeles was financial adviser to Earl Jeans.
Asked why he sold his company, Ben Freiwald said: “We took a lot of risk off the table. The reality was as the company grew larger, our day-to-day risk became bigger and bigger. That’s a pretty big motivator. The key was we felt the brand needed to go to the next level and we needed help with that. Nautica brings a lot to the table. We could be dead wrong on this, but we feel we are tapped to be the next global denim brand. There’s only a few that emerge every generation, like Diesel and Guess in the Eighties. We feel we have a chance at that.”
Asked how Nautica will grow Earl Jeans, he acknowledged that a retail rollout was likely. “It’s [retailing] a personal thing for Harvey. He likes to do it.” An Earl Jeans chain would take the form of “small stores in major urban centers to support existing distribution at other stores, but nothing real blown out,” Freiwald said. He said the brand is sold at 700 doors in the U.S., including many small boutiques, as well as Neiman Marcus, Saks Fifth Avenue and Nordstrom. Jeans retail from $110 to $130, depending on the wash; leather items sell for $500 plus, while sportswear is in the $100 to $200 range.
Currently, the only Earl Jeans store, a unit with just 600 square feet of selling space, posts $60,000 to $75,000 in sales per month, according to Freiwald. “That’s great for Los Angeles, but not much for SoHo,” he said, adding that a few cities are already getting scouted for sites, including New York and London. In New York, SoHo is targeted. Sanders said that a SoHo store could open by the end of the year.
Freiwald said Earl Jeans will continue to be based in Los Angeles, where there is a staff of 60. “People are what make the company,” he said. However, there could be consolidation of certain back-office functions such as accounting.

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