ANALYSTS SEE EARNINGS GROWTH SLOWING
Byline: Thomas Cunningham
NEW YORK — It couldn’t last forever, and it hasn’t.
The midteen-and-higher earnings growth rates turned in by most big apparel makers in the last few years will be hard to match in 2000, according to Wall Street analysts. Excluding the woeful performance of bankrupt Fruit of the Loom, a group of top apparel manufacturers posted a collective earnings increase of 26.5 percent during last year’s final quarter, a performance that may defy improvement.
Several factors are contributing to the slower earnings growth, including the Federal Reserve’s aggressive interest-rate policy designed to slow economic growth, some signs that consumer confidence may be sagging, and the ongoing travails of department stores as they struggle to regain share from specialty retailers and mass marketers.
However, slower growth does not mean no growth. Analysts said several big vendors, including Polo Ralph Lauren and Jones Apparel Group, have had solid, if not stellar, spring sell-throughs and should meet expectations in the quarter. And some makers, most notably Kenneth Cole and Guess, are riding strong consumer demand and should deliver double-digit earnings boosts for the quarter.
A survey of 20 apparel makers showed that fourth-quarter earnings fell 70.6 percent compared with a year earlier, even as sales climbed 10.7 percent. However, excluding Fruit of the Loom, the fourth-quarter earnings hike of 26.5 percent was paired with full-year earnings growth of 15.8 percent while sales grew 11.8 percent.
While the short-term outlook for profits may be questionable, sales for the closing half of this year could get a boost from several high-profile new lines, including Kenneth Cole’s contemporary women’s line, Kasper’s revitalized Anne Klein 2 sportswear line, Perry Ellis’s return to women’s sportswear, Jones Apparel Group with its Nine West contemporary line and Levi’s Slates women’s sportswear.
Led by Kenneth Cole’s high-profile introduction, the burst of entries in the better-price contemporary area could help to attract new customers, but will also bring with it new challenges, according to Susan Silverstein, analyst at Banc of America Securities.
“At the high end there’s BCBG, Laundry and Theory as contemporary labels, but they are only in a select number of stores,” Silverstein said. “Kenneth Cole women’s will establish a better price point for contemporary styles and bring more fashion into the better zone. That may attract some women away from specialty stores and into department stores.
“It’s also going to be more competitive because each of these launches will have to stake out some footage, and that’s a finite resource, so obviously somebody has to lose.”
In fact, one of the most noticeable trends in the industry is the continuing dominance of specialty retail over department stores, according to Joseph Teklits, analyst at Ferris Baker Watts. Several vendors are expanding their own full-price retail operations as an alternative to saturating department stores with their brands, he noted.
“That’s one of the major trends in the industry right now, whether it’s Prada or Guess or Quiksilver: All of them would much rather grow with their own retail stores than open more department store doors,” he said.
The interest rate hikes of recent months are starting to take their toll on apparel makers, which are still far from regaining ground lost in a sector-wide slump late last year, said John Pickler, analyst at Prudential Securities. But several key indicators, including consumer confidence and inventory levels, seem to contradict stock valuations and suggest that makers are on track for another profitable year, Pickler said.
“The consumer seems to be fine, manufacturing rates seem to have improved a bit and inventories are in very good shape, so we would expect the companies to do reasonably well this year.”
However, Banc of America’s Silverstein said it was unclear what effect rising interest rates were having on consumers’ optimism.
“The numbers tell us that [consumer confidence] was at peak levels in January but has been cooling down in February and March,” Silverstein said. “It remains to be seen what the effect the Fed’s interest-rate hikes are having in terms of the consumer.
“Job security remains unchanged, and that’s a good sign,” she continued. “We’ve had two very solid years of a consumer-driven economy. I don’t think it will keep up the pace it has for the last few years. I don’t think it means recession, but moderation is probably in order.”
On the plus side, the rebirth of color and sexiness is pulling women into stores and the resurgence of fashion denim is attracting both women and men, Teklits said. In the men’s business there is a shift to more contemporary styles by adult consumers, while younger customers are supporting the growth of smaller brands like Ecko and Girbaud.
The strong market for fashion denim and the comeback of sexiness all work in favor of Guess, according to Teklits. Well on the comeback trail after a two-year slump, Guess is now “red hot,” Teklits said. He estimated the firm’s earnings would grow to 31 cents a share against 27 in the first quarter and $1.45 against $1.20 in the year.
Guess is the brand of choice for young consumers, and department stores are allocating the brand choice real estate, Teklits said. Add to that Guess’s own retail operation, where sales are surging, and Guess is positioned to deliver per-share profit gains of more than 20 percent over the next three years, Teklits said.
Guess’s co-founders, the Marciano brothers, “are talented enough to capture the opportunity there,” Teklits said. “It’s a home run.”
Kenneth Cole, which many believe is on the verge of achieving the brand recognition of a Polo or Hilfiger, will introduce its upscale Kenneth Cole women’s line this fall in 200 doors. Company-owned retail is also a big part of the firm’s growth strategy, Teklits said. With 63 retail stores now operating, Kenneth Cole plans to add about six stores this year, boosting its selling-square-footage to about 230,000 square feet, Teklits estimates.
“It has just been an incredibly well-nurtured brand,” Teklits said. “The modern aesthetic is a look that has grown in importance, and Kenneth Cole brings that look with a designer-like label to the masses at good price points, and he does that better than anyone else.”
Coming on top of the company’s solid footwear and handbag business, the women’s line, licensed to Liz Claiborne, should strengthen the firm’s efforts to build a lifestlye brand, Teklits said. He estimated Cole would earn 45 cents a share against 35 cents in the first quarter and $2.28 against $1.78 for the year.
One of the likely laggards this year is former high-flyer Tommy HIlfiger, Teklits said. “On the men’s side, there are three important trends.
Authentic street and skate brands — authentic being the key word — are popular, the modern aesthetic is popular and luxury is growing in importance. Tommy doesn’t fit into any of those niches right now. Men’s is not good at all, jeans are doing OK and women’s is still not clicking and never has clicked, really.”
Teklits estimated that, for the fourth quarter that ended in March, Hilfiger would report profits of 37 cents a share, down from 48 cents. For calendar 2000, Teklits expects Hilfiger to earn $2.16, down from $2.29 in 1999.
Most basics makers are having a tough time, in part because the basic denim market has been weak as the demand for fashion denim has been on the upswing, Pickler said.
One bright spot on the horizon is the knit products business, where the recent difficulties of Fruit of the Loom have created opportunities for some competitors to capture market share, he noted.
For VF Corp., which struggled last year with soft demand for denim in Europe and weak sales at middle-market department stores in the U.S., there are some positive signs, Pickler said. The European denim market is showing some signs of firming up and VF’s fleecewear and T-shirt business should improve its results over last year, he said.
And VF’s recently announced plan to acquire backpack maker Eastpak should firm up the leading position in the backpack market it already enjoys with JanSport and give it some significant growth opportunities, Pickler said.
He expects VF to earn 67 cents in the first quarter, against 69 cents, and $3.10 in the year against operating income of $3.04 in 1999.
One big event at Perry Ellis, formerly Supreme International, was the reintroduction of women’s sportswear at about 180 doors this fall. Perry Ellis has also done a good job of staying in front of the fashion curve, making good use of synthetic fabrics and riding the Latin trend with its Cubavera line, according to Pickler.
With strong sell-throughs of spring merchandise, Perry Ellis is on track for a good year, Pickler said. He estimated the maker’s first-quarter earnings would jump to 58 cents a share against 43 cents and its full-year results should climb to $1.90 from $1.59.
For the current quarter it appears that Polo Ralph Lauren’s business is on track to deliver a modest gain over last year’s results, according to Silverstein. Polo Jeans continues to be a solid performer, both at company-owned stores and department stores, she said.
The addition of Poloco, the European licensee that Polo bought in January, should help Polo to increase the penetration of its brands in the European market she said. “They’re going to be rolling out Polo Jeans and Lauren in a bigger way over there,” Silverstein said.
Silverstein estimated Polo would earn 32 cents a share in the quarter in its fourth quarter ended in March, bringing in the fiscal year at $1.45. Excluding charges, last year Polo earned 27 cents a share in the quarter and $1.25 in the year. Next fiscal year, Polo should earn $1.72 a share, Silverstein estimated.
Jones, which in 1999 repositioned Evan-Picone as a moderate brand, could strike a private-label deal with a moderate or mass market retail store like Sears, Kohl’s or Target, Silverstein said. Its Nine West apparel line should do about $15 million to $20 million in the fall and holiday season, Silverstein estimated.
“It’s more updated, more modern looking, more for a contemporary customer,” she said. “It’s a a little too early to tell, but if Nine West repeats what Ralph did, it could be can an $80 million-plus business in its second year.”
Jones seems to be on track to meet expectations for both sales and earnings in the quarter, Silverstein said. She estimated Jones would earn 55 cents a share in the quarter, against 51 cents, and $2.45 for the year, against $2.02 a year ago.
Liz Claiborne, which bought Lucky Jeans and Laundry last year, is doing a good job moving its business away from its core line and into new labels, Silverstein said.
The big news in 2000, however, is the Kenneth Cole line, which Claiborne is producing under license.
The line, planned to be introduced in 200 doors, is priced well, Silverstein noted. Pants are at $125, sweaters are $88, a leather jacket is $298 and leather pants are $198.
“The line looks great,” Silverstein said. “It has a sophisticated, kind of city look and a lot of great fabrications. It’s Kenneth as you expect Kenneth to be.”
Claiborne’s licensed DKNY jeans and active business is doing well, and the DKNY junior line launched this spring at 270 doors appears to be doing very well, Silverstein said. Another big winner this year for Claiborne is Lucky, which should grow 30 percent over last year’s sales of about $80 million, Silverstein said.
Claiborne should earn 79 cents a share in the quarter, against 70 cents and $3.52 for the year, against $3.12 in 1999.