MOSSIMO’S TARGET DEAL TO REAP AT LEAST $27.8M

Byline: Thomas J. Ryan / Robert Lohrer

NEW YORK — Mossimo Inc.’s three-year licensing agreement with Target Stores will generate a minimum of $27.8 million in royalties for the company, and Cherokee will realize more than $4 million in fees for brokering the deal.
According to an 8K filed by Mossimo with the Securities and Exchange Commission, the $1 billion in minimum guaranteed sales calls for $300 million in the year commencing Feb. 1, 2001, and $350 million for the two subsequent years. Annual royalties start with 4 percent on the first $100 million of sales each year, 2.25 percent on sales between $100 million and $500 million and 1 percent on any sales greater than $500 million.
Putting minimums and royalty percentages together, Mossimo will receive at least $8.5 million next year and $9.63 million each year in 2002 and 2003. The Target agreement has an initial term that expires in January 2004 and is renewable at the option of Target.
Mossimo also will pay 15 percent of royalties received to Cherokee for its work in putting the deal together, which dates back to mid-February. The Cherokee brand is responsible for more than $1 billion in annual sales at Target.
The 8K also revealed the exclusivity arrangements connected to the deal. The contract specifically bars Mossimo Giannulli, founder and chairman of the Irvine, Calif., company, from providing design services for Wal-Mart, Kmart, Costco, Sam’s, J.C. Penney, Sears, Kohl’s, Dollar General, Pic’n Save, Hills, Bradlees and Ames. However, according to the filing, Giannulli will be able to work with existing licensees and sell to golf pro shops on the premises of golf courses. Giannulli said the company could seek new global licensees as well.
Target will show Mossimo samples of products and advertising, and Mossimo will have five days to approve or reject each such submission. Giannulli cannot use the trademarks or enter into a design agreement with any other retailer, manufacturer or distributor without prior written consent. Target is required to portray the labeling, packaging, fixtures and advertising of the Mossimo line as “of good quality and workmanship at least as high as” Merona, its most high-end private label line.
The agreement also calls for Mossimo to “use its best efforts” to cause David Duval, the professional golfer and spokesman, to continue to advertise and promote the brand “as reasonably requested” by Target, including modeling and personal appearances.
The filing indicates the firm was close to a similar deal with J.C. Penney prior to consummation of the Merona arrangement.
In an interview, Giannulli said the firm that bears his name now will function as a “pure design facility” and about 100 employees will be let go. As reported, Edwin Lewis resigned as president and chief executive of Mossimo at the time of the Target announcement, and Giannulli revealed that Lewis’s stock has been sold.
The designer said he foresees the retention of a staff of about eight, including himself and four other designers, a chief operating officer, vice president of finance and a licensing executive.
Positioning itself as a licensing company with 14 employees, Cherokee had revenues of $19.3 million in its last fiscal year. The company ceased manufacturing in 1995. Announcement of the Target arrangement pointed out that “severe price reductions in department stores, resulting in greater markdown assistance from the company,” played a substantial role in the $7 million net loss suffered by the company in the quarter ended Dec. 31.
“The major retailers are killing people like me,” he told WWD last week. “I wasn’t getting anywhere, so I said, ‘Let’s go directly to a retailer who can embrace our philosophy. Let’s no hide behind the veil of, oh, we’re status designers,’ because by the time department store retailers mark it up and mark it down, it’s the same price as it is at Target.”
While Mossimo may in time receive fiscal and creative approval of its recent moves, Wall Street was unable to look beyond the company’s recent woes and continuing cash shortfalls. The stock, which had been trading at a bit more than half of its 52-week high of 11 7/8, fell another 50 percent toward the end of the week. Shares closed at 2 7/8 Friday, down 1/8. That’s only marginally better than the 52-week low of 2 11/16.
But Giannulli’s thoughts on his new design persona revealed as much affection for his new retail partner as they did animosity about his former retail targets.
“They may be poo-pooing this in circles I competed in, but as a designer, I can think of no better opportunity to do great things that get to masses of people, priced well,” he said.
He doesn’t feel that consumers are cognizant of the thick lines drawn between different tiers of distribution by those in the industry.
“Our customer is in that store,” he said of Target. “Truth be told, I think the Gucci customer is in that store. Target is a young, forward-thinking company. You can get a Smashing Pumpkins CD and you can get a slurpee, all in the same place. That’s where kids are going.”
In a prepared statement, Cherokee chairman and ceo Bobby Margolis said, “A metamorphosis is taking place in American retailing whereby the leading retailers with skill sets like Target are doing their own sourcing, enabling them to provide much greater value to today’s consumer. When retailers combine their sourcing expertise with powerful consumer franchises and, in this case, Mossimo’s superior design direction, the results are extraordinary.”