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NEW YORK — It’s a girl!

This story first appeared in the January 5, 2004 issue of WWD. Subscribe Today.

Bernard Chaus Inc., the $140 million sportswear firm, is the proud new parent of Cynthia Steffe.

Extricating itself just in time from LF Brands, which went out of business Christmas week, Steffe was sold Friday to Chaus, a publicly held company, marking the apparel industry’s first deal of the new year. The purchase price was undisclosed, but industry sources estimated that Chaus paid LF Brands about $5 million for the Steffe business.

LF Brands is expected to file for bankruptcy protection this week. According to sources it is not clear if the company will file Chapter 7 or 11, but either way it is expected to liquidate.

“We’re really pleased,” said Richard Roberts, president of Steffe, a contemporary sportswear firm whose volume is approaching $20 million. “We’ve been working on it for six months, ever since we decided LF Brands wasn’t going to be a long-term partner. Financo [the investment banking firm] was shopping the business for us.”

Roberts, who is married to Steffe, said they spoke to many companies all over the world before making their decision.

“What we liked about Chaus was it wasn’t one of the biggest companies. We didn’t want to bury ourselves inside one of the big three or four. That’s a dangerous thing,” he said. “We’re not a company that wants to be homogenized. We’re very product driven and design driven, and most big American corporations aren’t design driven. Big American companies are merchandise driven. We’ve got a big, expensive design room and we’re still a domestic maker.”

Josephine Chaus, chairwoman and chief executive officer of Chaus, said the Steffe acquisition gives the company a foothold in the contemporary arena. “It’s a very exciting marketplace and Cynthia is a very talented designer. We look to expand the business and grow it to new levels. It brings us into a new category,” said Chaus, whose businesses are mostly in the moderate sportswear area of department stores and specialty retailers.

Steffe, which has had slow and steady growth since it was launched in 1989, in 2000 became a division of?LF Brands — then known as Leslie Fay Cos. At the time, there were big plans to take Steffe global and launch new divisions, such as accessories and denim.

According to Gilbert Harrison, chairman of Financo Inc., who brokered the deal, “Cynthia Steffe has been hampered because of the financial problems at Leslie Fay. They couldn’t get the working capital to build this business.”

Harrison noted that he spoke to a lot of potential buyers, “but the chemistry between Josephine Chaus and Cynthia Steffe, as well as Rick Roberts and Nick DiPaolo [Chaus’ vice chairman and chief operating officer] was extremely good. They [Roberts and Steffe] felt they wanted to be part of the Chaus family. Cynthia is a designer, Josephine is a designer, and it brings Chaus into upscale specialty stores, and the sourcing at Chaus is very good.”

In addition, Harrison added that the Steffe sale frees up the process to dispose of LF Brands’ various assets. It is expected that LF Brands will retain Financo to explore the sale of the company’s trademarks and brands. Harrison said a number of companies have already expressed interest in the properties.

“It’s unfortunate what happened to LF Brands. The casualty is enormous and it had fallen on hard times. Obviously working capital at LF Brands had to go into its major businesses, and Cynthia Steffe had been starved for capital and couldn’t continue their growth.”

Harrison said he’s been advising Chaus on growth strategy, and has been working with DiPaolo and Chaus as they have turned around their company over the past two years. “They made a lot of money, but had fallen on hard times, and thankfully it’s going to get bigger now,” he said.

Josephine Chaus said she plans to give Roberts and Steffe the freedom to manage their business. She said she will serve as a “sounding board,” and will offer assistance and input when needed.

“Cynthia brings the talent, and it will run as it has been running,” Chaus said. “We have the expertise in manufacturing and the back end of the business. We’re very experienced in making ladies’ apparel and we have the sourcing and manufacturing base.?It’s a very good combination of talent and resources. We can all work together — both companies and the management teams.”

That should suit Roberts, who has been running Steffe at LF Brands with little interference.

“We operated autonomously and that was the beauty of what we did here,” said Roberts. “We only used Leslie Fay’s financing and warehousing.” Design, merchandising, sales and production were handled independently.

Employing 35 people, Steffe produces most of its sportswear in New York, with a portion overseas. Its biggest customers are Saks Fifth Avenue and Neiman Marcus, with speciality stores such as Tootsie’s and Fred Segal among the other 1,000 retail locations where its products are sold.

The company’s showroom will remain at 550 Seventh Avenue.

“It’s been difficult with what’s been happening with Leslie Fay. It made our jobs [to close the deal] difficult because the finance and record-keeping people are no longer there,” said Roberts.

Steffe currently doesn’t have any licensees, but Roberts asserted, “we’re constantly barraged with offers for licensees.”

Roberts said that with Chaus’ financial backing, he hopes to offer more casual sportswear, which stores have requested, and plans to add licensed products. He would also like to open a freestanding store in the near future. The company currently produces two lines, Cynthia Steffe, a more expensive line, and Cynthia Cynthia Steffe.

“The business has been going great guns,” he said. “Our spring bookings were up 70 percent and we’ll do over $20 million this year.”

Chaus, which was founded in 1976 and went public in 1985, makes sportswear under the Josephine Chaus Collection, Josephine Chaus Studio, and Josephine Chaus Sport trademarks. In December 2002, Chaus acquired S.L. Danielle, a privately held manufacturer of moderately priced women’s brands. The acquisition provided Chaus with new capabilities in the private label arena and created a platform for expansion into the moderate segment of the women’s clothing market. Chaus’ previous experience as the licensee for Nautica women’s wear wasn’t too successful. “That was a long time ago,” said Chaus.

Roberts and Steffe previously worked with DiPaolo, so felt very comfortable teaming up with Chaus.

“We’ve known Nick for a long time. He worked for us as a consultant. I also knew Nick when he was ceo of Salant, and my dad [Bruce Roberts, executive director of the Textile Distributors Association] was on the board of Salant,” Roberts said. “Nick has done a great job at Chaus and returning it to a high profile and profitable business in the industry.”

When asked, Roberts said he wasn’t worried about Chaus’ lack of expertise in the contemporary market.

“They don’t need the experience. We have the experience. They’re going to let us run an autonomous business. They can supply financial support. The most important thing is the people. We really liked the top people,” said Roberts. “They have the support, [information systems] and the financial stuff and a network of offices around the world….We liked [LF Brands chairman] John Pomerantz, but unfortunately LF Brands’ business fell apart around him. Time passes brands by.”

Roberts said that by this morning all of Steffe’s merchandise will be in Chaus’ warehouse, “all with bank approval.”

Roberts said the effective collapse of LF Brands prompted Steffe to speed up the acquisition process.

“This was going to happen anyway, but it pressed us to move a little bit faster,” he said.

Roberts admitted that LF Brands’ troubled circumstances likely affected the sale price, saying, “In sunnier times for LF Brands, they would have gotten a better price for it.”

In its most recent fiscal year, ended June 30, Chaus had net income of $4.7 million, compared with a net loss of $2.2 million the previous year. Revenues for fiscal 2003 were $140 million, down from $145.8 million a year earlier.

The closing of the deal lifts the Steffe business out of the LF Brands’ portfolio at a troubled time for that company.

LF Brands fired all the employees in its Laflin, Pa., plant on Dec. 19 and on Christmas Eve a voice mail message was left on the number of its chief restructuring officer, Marvin Davis, informing its New York employees that they were terminated. LF Brands, whose volume had fallen to about $120 million, said it was unable to pay the employees, totalling about 150 at both locations, and advised them to file for unemployment benefits.

The method and timing of the closure set off a storm of criticism from LF’s former employees, with one calling the move “a sad portrayal of Seventh Avenue.”

Executives from Three Cities Research, a private investment firm which owns about 75 percent of LF Brands, have declined comment on the closure. But many questions remain unanswered, including what will happen with LF Brands’ spring merchandise.

Reached for comment last week, Pomerantz told WWD that he felt terrible about what happened to the company, and especially what had happened to the employees.

“I’ll do everything in my power to help them get the benefits,” he said. He said he was also terminated from the company, but will consult with them going forward. He continues to own about 6 percent of the firm.

“The pity is it would have been a really great year next year. The spring season was going to be great. Stores had been very supportive,” he said. He declined to discuss what precipitated all the problems and the company’s abrupt closure.

Rick Darling, president of Li & Fung U.S.A., the company’s sourcing agent and largest creditor, said that 60 percent of?LF Brands’ spring merchandise is currently en route from overseas.

“There are a tremendous amount of goods on the water and in Customs.?LF Brands can’t pay for and accept them. We have significant exposure to that inventory, since we act as the agent,” said Darling. He said one option would be for LF Brands and its lenders to?reach an agreement to ship the merchandise to customers, but Li & Fung isn’t in control of that decision. However, it is discussing the possibility of taking possession of the merchandise and shipping it itself.

Hong Kong-based Li & Fung, the $4.2 billion global sourcing and supply chain management company, was retained in 2002 to handle Leslie Fay’s fabric and manufacturing sourcing worldwide.?It?handled?65 percent of LF Brands’ sourcing — half of its sportswear business, and two-thirds of its dress business, said Darling.

He said all the dresses for January and February have been shipped, and March deliveries are in the process of being shipped.

“It’s a sizeable amount of inventory,” he said. The merchandise bears the Joan Leslie, Joan Leslie Classics, Leslie Fay Sport and Leslie Fay Dresses labels. He pointed out that other sportswear and dress vendors have also shipped merchandise for LF Brands from overseas.

Since 2002,?Li & Fung has had a global team of more than 80 people working on the LF Brands account in such countries as?Hong Kong, The Philippines, Indonesia, China, Thailand and India, as well as Central America, said Darling.

Li & Fung is LF Brands’ largest secured and unsecured creditor, said Darling. While it does not hold an equity stake in LF Brands, in early October, it gave the firm financial support through a loan facility and received warrants, he said. Three Cities Research and management owns the rest of the stock, he said.

“We’re disappointed and dismayed. We’ve been the company’s largest creditor in purchase order financing, and we have loans with the company,” Darling said. “We have been very actively trying to support the company.”

Darling said LF Brands has a history of financial issues and had been losing money over the past couple of years, with serious losses over the past six to 12 months.

“They attempted over the last 18 months to restructure the company. The restructuring may have taken too long or it was too little too late. The bank made a decision in their best interest,” he added, referring to LF Brand’s banker CIT. Among some of LF Brands’ recent initiatives were trying to sell the Steffe business and doing an exclusive deal with Saks Inc. for the Breckenridge line.

As of Wednesday, Darling said no bankruptcy filings have been made, but he believes LF Brands will most likely file shortly.

Some LF Brands employees blamed Li & Fung for the demise of the firm, though Darling asserted that anger is misdirected.

“We’re trying to figure out what to do,” he said. “We will be the company’s largest creditor by far. It’s clearly against our interests to have this happen.”

Whether LF Brands could re-emerge as a new entity, Darling said, “I think given the employee situation and potential disruption of the pipeline, it would be difficult for the company to operate in anything close to its current format. At this stage we’re concerned about the current position as a creditor and what they’re doing about employees.”

Would Li & Fung consider stepping in to help the employees?

“I don’t have a resolution. Certainly I’d like to see the situation resolved,” he said. “It’s a question of ownership as well as lenders to make that determination.”

Was he surprised that LF Brands closed up shop so suddenly?

“I was not surprised the company hit the wall, as it was moving in that direction,” he said. “I was surprised by the conclusion that took place.”