MCNAUGHTON’S CAUTIOUS COMEBACK
Byline: Shirliey Fung
NEW YORK — The McNaughton Apparel Group is betting that slow and steady will win the race.
“We’re very cautious of how we do things there, we really try to evaluate the cost-effectiveness of everything we do,” said Peter Boneparth, president of the firm, which has annual sales of about $500 million. “It’s important to understand that philosophically we’re sales driven, but most importantly, we’re profit driven. We’re very conservative because we’re interested in maintaining margins.”
Lately, the tortoise approach has been working. McNaughton reported a 167.5 percent jump in earnings to $6.6 million in the third quarter ended Aug. 5. Sales jumped 28.7 percent to $119.5 million, while gross margins rose to 29.4 percent from 27 percent a year ago and operating expenses were reduced to 13.8 percent of sales from 16.1 percent.
In the nine months, profits reached $19.6 million, or $2.38 a share, from $3.6 million, or 47 cents, a year ago. Sales climbed 30.4 percent to $369.6 million.
The stellar results were the sixth in a series of quarters in which earnings have grown.
Adding to its fiscal strength, the company received a commitment letter this week for a new $225 million revolving credit line from a bank group consisting of Bank of America, the CIT Group and Fleet Capital. The three-year senior secured facility represents a $50 million increase over its previous credit arrangement.
Boneparth attributes the firm’s recent success as a combination of macro- and microfactors: The continuing consolidation of the vendor matrix and the company’s execution have worked together to increase sales and earnings, he said.
Five years ago, the picture wasn’t quite as rosy. After growing quickly in the early Nineties, McNaughton started to come under fire from department store consolidation and competition from such companies as Kellwood Co. and Alfred Dunner. The manufacturer of such labels as Norton McNaughton, Miss Erika, Energie and Currants started seeing sales level off and profits erode.
Fast forward to 1997 and Boneparth’s entrance. The investment banker cum president instated a number of key reforms, such as streamlining and updating the merchandise, attacking overhead costs and making key acquisitions that have brought kudos from the retail and investment worlds.
“The fact that they have focused on very edited assortments has brought a big uptake in business. It makes it much easier for the customer to put an outfit together,” said Diane Paccione, vice president and general merchandise manager at Sears, Roebuck & Co. Boneparth believes that it’s critically important to limit assortment because the target customer is “very time-stressed and so she doesn’t have the luxury of looking through a wide collection.”
“We want her to come and see a top, a bottom, a layering piece, buy the items and leave,” he said. “I think we’re very good at that and I think we can continue to do better at that.”
Another main component of the company’s recent success could be attributed to its focus on cutting costs.
“We’ve attacked costs pretty religiously,” said Boneparth.
Three years ago, the firm did about half of its sourcing abroad. A year ago, the percentage had risen to about 85 percent and it now sources nearly 100 percent of its lines outside the U.S.
“We believe that it is impossible to be price competitive and produce a domestic garment,” said Boneparth.
Streamlining personnel has also helped reduce overhead costs. Since Boneparth began three years ago, the employee count has dropped from 300 to 140. Moreover, many key personnel changes have been made: More than half of the current number of staffers have come on board in the last two or three years.
While Boneparth said that no one person has been the reason for the company’s recent successes, he applauded the efforts of Michael Kauffman, who joined the company nine months ago and is executive vice president in charge of distribution and logistics, and Lynne Fish, a veteran of the moderate market who started her career at J.C. Penney Co. and came on board two years ago.
“Lynne has brought with her both a very unusual set of qualities. She has a very high taste level and a very strong production background,” said Boneparth. “By having someone that has a sensitivity to design and production, we’ve accomplished a great deal.”
McNaughton continues to work on other ways to trim costs. It has invested in a 300,000-square-foot distribution center in Charleston, S.C., that shipped its first full month of Norton McNaughton merchandise in August. While it’s too early to gauge the cost benefits of the facility, Boneparth said that he expects to “achieve operational efficiencies over time.”
He added: “We were in a third-party relationship where we were paying a service in New Jersey to ship per unit and we think by bringing that in-house we will not only lower our cost, but we will ship better over time. It’s really that we have control over our own destiny.”
Kauffman, who was in charge of distribution at Calvin Klein, is spearheading the South Carolina distribution center.
John Rouleau, a senior analyst at Gruntal & Co., who started covering McNaughton in April, pointed to the current retail climate as one of the reasons he believes it and other moderate companies will continue to do well.
Rouleau said that McNaughton “is very well positioned to benefit from the trend of growing moderate and budget markets.”
“As the moderate market grows in size, there are fewer and fewer participants,” he added. “It just means that everybody, including McNaughton, will be getting a bigger piece of the pie.”
Rouleau pointed out that the company’s full integration of the Miss Erika and Jeri-Jo divisions, which were respectively acquired in September 1997 and June 1998, bodes well for future purchases.
“From an integration and a management perspective, the company would be ready to take on another acquisition,” he said.
However, he added that the firm will likely wait at least a year to acquire anything new, since it has stated that it does not want to add any more debt to the balance sheet.
When the time is right, McNaughton will likely make a purchase in the budget channel. Currently, the manufacturer does minimal business with Target Stores, Wal-Mart and Kmart.
“The budget sector’s a $50 billion annual business while the moderate sector is $20 billion, so you’re talking about a sector that’s very large that ultimately has some nice growth potential for a company like McNaughton, which is capable of delivery,” said Rouleau.
Boneparth couldn’t agree more.
“We are very focused on penetration into the budget channel,” he said. “The way to be in that business is most likely through acquisition. The dynamics of operating in that business are slightly different — lower gross margins and lower overhead — but it could yield an attractive operating margin consistent with our corporate objectives.”
Boneparth added that there were no imminent acquisitions, but said “we always are evaluating opportunities.” Those opportunities have certain criteria: McNaughton is only looking at companies that have more than $100 million worth of volume, that will not be dilutive to earnings and that have management that will stay with the company.
In the past two years, the company — which does the bulk of its business with J.C. Penney Co., May Co., Federated Department Stores, Sears and Kohl’s — has toyed with the idea of expanding business to alternate distribution channels such as QVC and catalogs, but has decided to now focus on growing its existing “bread and butter” channels. Boneparth cited growth opportunities at Belk’s, Bon-Ton and certain divisions of Saks Inc.
In the next few years, Boneparth hopes that acquisitions and expansion in existing business will grow McNaughton to a billion-dollar company.
To do so, the vendor will continue to focus on branding the Norton McNaughton label. Boneparth said that the company’s print ad campaign, which bowed last spring in magazines such as O and InStyle, has succeeded in “raising the visibility in the eyes of the consumer, as well in our retail customers.” Plans include extending its advertising presence to magazines such as Essence because “we have a very strong ethnic customer,” said Boneparth.
Fish said that the biggest challenge faced by the company is to turn the label into a megabrand.
“We will expand our brand offerings to include clothing and accessory lines, which will fulfill all the needs of this customer,” said Fish, adding that licensing will also be a part of a five-year strategy, and that shoe and handbag categories are definite possibilities.
The Miss Erika business will focus on growing its fall business, which is disproportionately smaller than its spring sales and, thus, has significant opportunities for increases.
“Fall is an undertapped business,” said Boneparth. “We’ve made fall much more of a wear-now type of business. Before, we only had one fall showing and it tended to be very heavy merchandise, which was difficult on the floor in August and September.”
Boneparth declined to give exact numbers, but said the company has experienced a strong increase at retail and in bookings since it started offering two fall collections.
By the end of 2001, an ad campaign may also be in the cards for the Miss Erika label.
“Over time, we will look to exploit the Erika brands, as well as the more junior brands in a more meaningful way,” said Boneparth.
He said that junior division Jeri-Jo should see sales opportunities for the Energie, Currants and Jamie Scott labels with existing and new customers.
“We really like the demographic of the junior market,” Boneparth said. “In that segment of the market, there is real customer creation.”
As these two divisions grow, he pointed to the increased operating leverage of the Miss Erika and Jeri-Jo divisions as a major cost benefit.
“They operate on very low-cost structures — they don’t advertise, they don’t have as many personnel,” he said. “They are lower-overhead businesses. They have a lot of prepacks that are easier to ship than the collections like we ship in Norton.”