MOSSIMO SCORES $1B DEAL WITH TARGET AS CEO LEWIS RESIGNS

Byline: Arnold J. Karr

NEW YORK — Mossimo Inc. has seen the future, and it isn’t in wholesaling.
The troubled Irvine, Calif.-based lifestyle brand scored the biggest coup yet in the growing field of direct-to-retail licensing by striking a long-term arrangement that initially will make Mossimo a house brand for women’s and men’s wear in all 923 U.S. Target Stores. Although current Mossimo licensees aren’t initially affected, the blockbuster arrangement may ultimately include all soft line categories, fragrances and housewares.
With the dramatic decision to exit wholesale, Edwin Lewis resigned as president and chief executive officer of the company, leaving Mossimo Giannulli, the firm’s founder, chairman and creative director, essentially as the designer and public relations representative for the brand that bears his name. Lewis will remain with the company in what Giannulli termed “an advisory role.”
Giannulli and Lewis weren’t available for comment, and specifics of the licensing arrangement weren’t divulged, but Mossimo disclosed that the license with Target carries a cumulative three-year sales guarantee, as of February 2001, of $1 billion for use of Mossimo designs and its trademark.
One of the pacesetters in the retail licensing field, Cherokee Inc., which set up a similar deal with Target several years ago, advised and assisted Mossimo in the negotiations. Sources put sales of the Cherokee brand in Target stores at over $1 billion per year and noted that Mossimo’s volume with the nation’s third largest discounter could match that mark.
“Cherokee has pioneered what I believe to be a truly successful and unique strategy for the retail industry,” Giannulli said in a statement. “While my personal involvement and product design make this deal different from the Target/Cherokee agreement, the template established by Cherokee remains the same.”
In exchange for one of the highest profile apparel design names to ever dedicate its business to the mass market, Target, in addition to royalty payments, will be responsible for collaborating on design and will be responsible for product development, sourcing, quality control and inventory management.
The arrangement not only mirrors Cherokee’s arrangement with Target and those in housewares under the Michael Graves and Philippe Starck labels, but also borrows on mass-market branding such as Kmart’s arrangement with Martha Stewart and Wal-Mart’s use of numerous “mature” brands.
At the same time that it disclosed its plans with Target, Mossimo gave unaudited results for the quarter and year ended Dec. 31, underscoring the need for a new approach to its business.
For the quarter, the company had a net loss of $7 million versus a $2.6 million loss in the 1998 quarter. Sales dropped 12 percent, to $7.4 million from $8.4 million. The drop in sales was attributed to “severe price reductions in department stores, resulting in greater markdown assistance from the company,” its statement said. The cost of sales alone was given as nearly $10 million.
Even with the reinvention of the business and its new alliance with Target, the company is facing difficult financial challenges. It said that its independent public accountants had informed it that, without new financing, “its auditor’s report on the financial statement as of Dec. 31, 1999 will be qualified as to the ability to continue as a going concern.”
Since royalties from its activities with Target aren’t expected until May 2001, Mossimo said it is seeking financing “to cover anticipated operating shortfalls during this interim period.”
Mossimo also said it would be streamlining operations to focus on design and finance, resulting in substantial layoffs of personnel in other areas.
Target Corp’s chairman and ceo, Bob Ulrich, noted that Giannulli “has a strong, loyal following among our design-savvy guests. His vision and creativity will help us continue to provide cutting-edge design at an affordable price.”
For the year, Mossimo’s sales were up 4.6 percent, to $47.4 million, as its net loss narrowed somewhat, to $13 million from $13.8 million in 1998. Net royalty income, the basis of the company’s financial future, reached $3.7 million, 14.7 percent ahead of 1998 levels.
The decision to focus its business on Target’s discount division, which last year had sales of $26.1 billion and pretax profits of over $2 billion, ends what at moments appeared to be one of the more impressive comeback efforts by a designer focused on the department store channel of distribution. Last November, the combination of Giannulli and Lewis helped create the first quarterly profit since 1997, and many thought that Lewis, a former vice chairman of Tommy Hilfiger who made his reputation at Polo Ralph Lauren, might turn the company around.
Giannulli also outlined many steps taken during Lewis’s tenure to right the company’s course and take advantage of a respected designer name among men and women. In addition to new marketing initiatives “more reflective of our contemporary brand image,” he cited the transformation of the firm into a “modern collection business, which allowed us to significantly increase our penetration in department stores.”
In language more dramatic than found in most releases, Giannulli said, “But as the retailers continue to rely more and more on the brands to meet their margin goals, it has become increasingly difficult for undercapitalized companies, like ours to compete.”

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