Congress may mull over the new president’s economic stimulus package for weeks, but Hartmarx Corp., whose suits have become a favorite of Barack Obama, is scrambling to assemble a rescue plan of its own after filing for voluntary Chapter 11 bankruptcy late last Friday.
The venerable producer of Hart Schaffner Marx and Hickey Freeman, which has been producing tailored clothing since 1872, began work on two major tasks Monday — first, locating a buyer for the ailing company, and second, trying to calm the market’s concerns about its near-term ability to produce and ship product.
“Our debtor-in-possession financing will allow us to ship orders for spring 2009,” Homi Patel, the company’s chairman and chief executive officer, told WWD Monday. “It will allow us to reorganize internally.”
Continuing operations as usual will be key to setting up a potential sale. Patel said he received a number of inquiries over the weekend, and market sources said possible buyers include Spencer Hays’ Individualized Apparel Group; JA Apparel, the owner of the Joseph Abboud brand; Jack Victor; Oxford Industries, which owns Tommy Bahama, and Peerless Clothing.
Executives from two of the above companies, who spoke on condition of anonymity, said they had not yet made any offers to Hartmarx, but acknowledged their interest in buying the Hickey Freeman and Hart Schaffner Marx brands — largely considered to be the company’s prized assets.
But buyers hoping to poach either brand should know Hartmarx is not interested in splitting the company into pieces. “We’re open to exploring opportunities,” Patel said. “But right now we are only talking to people interested in buying the company whole.”
That condition could shrink the pool of potential buyers even further. None of the potential purchasers contacted expressed interest in acquiring the company’s domestic factories or the long-standing relationships with the union that come with them.
“I only want the intellectual property,” said the ceo of a major men’s wear company, who requested anonymity but confirmed interest in buying Hickey Freeman, Hart Schaffner Marx or both. The executive met with Patel six weeks ago to discuss a sale, “but he wouldn’t sell the brand without the factories.”
On the financial front, the prepetition credit facility is secured by “substantially all the personal property and fixtures, including accounts receivable, of the borrowers and guarantors” under the agreement, according to an affidavit filed by Glenn Morgan, chief financial officer, in the bankruptcy case.
Some bankers concluded that with most assets already tied to the prepetition facility, there’s not much left for use as collateral for any additional post-petition facility beyond the existing $160 million debtor-in-possession financing. While Hartmarx is the first major vendor to file for bankruptcy since the financial crisis worsened four months ago, similar scenarios have plagued a number of bankrupt retailers that have been unable to exit Chapter 11 because the companies can’t get the financing they need to continue operations.
One banker, who spoke on condition of anonymity, said, “The chances of Hartmarx coming out of bankruptcy and keeping operations and assets as they were prior to the bankruptcy are slim to none.”
The banker, who knows the Hartmarx brand portfolio well, said market share for the tailored moderate market has been “eroding for the past 15 years.” He noted that what Hartmarx has to do is sell off its “winning divisions, but then there wouldn’t be much left to run the company.”
Bankers agreed that Hart Schaffner Marx and Hickey Freeman are the most valuable properties under the Hartmarx umbrella, followed by Bobby Jones and Monarchy. However, they cautioned there may be a limited number of buyers for the brands due to the difficulties involved in shifting production to another factory in the U.S. The one possible exception is Bobby Jones.
Additional brands, such as Austin Reed, don’t have as much value, and others, like the Barrie Pace catalogue and the Zooey brand, aren’t considered substantial enough of a presence to command top dollar.
Among the possible buyers, Individualized Apparel Group is considered the front-runner. The company has a proven ability to manage domestically produced apparel companies, like its Oxxford Clothes and Gitman Brothers operations, profitably. It has an understanding of the men’s dress-up business, knows both retail and wholesale operations, and its cash-rich chairman and founder Spencer Hays has an eye for bargain acquisitions.
Moreover, Hays already tried to nab Hartmarx before. In the late summer of 2001, he and an investor group made a hostile takeover bid for the company, offering to acquire its shares for $4.50, or $130 million.
Shares of Hartmarx, which were delisted from the New York Stock Exchange last November, closed at slightly above 2 cents in trading on the pink sheets Monday.
Hays might not be welcomed with open arms. The takeover bid became acrimonious when both sides took to name-calling, publicly berating the other with personal attacks. Hays ultimately lost the bid, but not before revealing his desire for the company. “We believe in Hartmarx’s premiere brands, but we believe they’ve been allowed to stagnate,” Hays said at the time.
Sources interviewed cited a rash of reasons for the Hartmarx’ troubles: the casualization of men’s dress, retail consolidation, softness in its heritage moderate tailored clothing business, the cost of producing domestically, too much diversification, not enough diversification and poor inventory management.
Morgan in his affidavit said, “During 2006 and 2007, revenues from the moderate priced tailored clothing and pant product categories in the men’s apparel group dropped by approximately $77 million during this two-year period.” Morgan added the company reacted to the change by closing three manufacturing facilities and eliminating several moderately priced tailored lines, but that those actions caused operational inefficiencies. In addition, replenishment programs also declined due to the slowdown in consumer spending.
On Monday, Patel said the bottom fell out of the 137-year-old company in only nine months.
But the trials of the tailored clothing market and the globalization of apparel manufacturing have weighed on Hartmarx for years. Its stock price has declined steadily since the late Eighties as its margins eroded, retail partners were lost to consolidation and demand for tailored clothing slowed.
Meanwhile, executives across Hartmarx dealt with the current crisis on Monday, working to calm retailers during the important fall selling season. Coppley, a Canada-based brand of better made-to-measure tailored clothing, and one of the few divisions of Hartmarx that did not file for bankruptcy, issued a letter to retailers urging them to continue to place orders as usual. “It’s my belief that we are operating successfully and independently of Hartmarx,” Coppley president Warwick Jones told WWD. He explained his brand’s manufacturing and sourcing structure were separate from the rest of the company, but said Coppley, while not part of the Chapter 11 restructuring, could still be sold “as part of the Hartmarx group or as a separate asset.”
Monarchy, the contemporary sportswear label Hartmarx acquired last year, issued a statement on Monday reiterating its plans to move forward with business, “even in this tough economic climate.”