NEW YORK — The highly kinetic Kellwood Co., which has been growing at a furious pace through acquisitions and licensing deals, saw a 70.3 percent leap in second-quarter profits.

But the company said Thursday disappointing fall and holiday orders, combined with start-up costs for its new businesses, helped dampen expectations for the rest of the year.

This story first appeared in the August 29, 2003 issue of WWD. Subscribe Today.

At the same time, Kellwood executives remained tight-lipped about a possible acquisition of Phat Fashions, but sources indicated Kellwood is still the front-runner and a deal could be right around the corner. Founder and chief executive officer Russell Simmons is said to be asking $300 million for the firm, which includes the Phat Farm and Baby Phat brands, and wants to remain at the helm.

Kellwood’s net income for the quarter shot up to $6.7 million, or 25 cents a share, from $3.9 million, or 16 cents, a year ago. Sales for the three months ended Aug. 2 increased 13.7 percent to $526.8 million from $463.3 million a year ago.

Kellwood’s largest business, women’s sportswear, saw a 9.3 percent rise in sales to $291.8 million, while sales of men’s sportswear advanced 24.7 percent to $121.1 million.

The quarter’s robust results, though, were paired with a reduction in sales and earnings forecasts. Investors traded down shares of the firm $1.70, or 4.6 percent, to $35.30 on the New York Stock Exchange Thursday.

For the full year, Kellwood is looking for earnings of $2.60 to $2.65 a diluted share versus $2.08 a year ago, before certain one-time items in both periods. Going into the year, Kellwood forecast profits of $2.70 to $2.80. Sales for the year are expected to rise 15 percent to $2.53 billion.

In addition to lower-than-expected fall and holiday bookings and start-up costs for new initiatives, expectations for the back half were deflated by the discontinuation of the company’s European Hosiery unit, which has seen its sales fall to $10 million, while operating losses were higher than expected.

Fall and holiday orders came in about $30 million below plan. About half of the shortfall resulted from promotional-item programs for its Sag Harbor and Koret brands not repeated by J.C. Penney Co. and Kohl’s Corp. The other half of the drop was due to the loss of some low-margin private label programs.

“The orders are softer because the current inventory glut from spring has flopped over for fall,” Hal Upbin, chairman and chief executive officer, said in a phone interview. “We’re not a reorder house and that’s why we took the sales down a little.”

Upbin, though, sees hope in the recent performance of retailers and the positive signs from the back-to-school season.

While the future may be looking up some, times have been tough for a while throughout the industry. To adjust, Kellwood managed its inventory closely, pulling down the goods it has on hand, excluding acquisitions, at the end of the quarter by $57 million, or 14 percent against a year ago.

Kellwood’s new licensing deals for Calvin Klein women’s sportswear from Phillips-Van Heusen and Def Jam University urbanwear from Phat Fashions will produce little volume in the second half, but require start-up spending equal to roughly 7 cents a share.

However, these are only two of the new projects in which the firm has embarked recently. Kellwood also has taken on licenses for Liz Claiborne dresses and suits, an Izod moderate women’s line from PVH, XOXO junior apparel from Global Brand Holdings, Run Athletics and Dockers’ tops with Levi Strauss & Co.

In all, Kellwood is spending about $8.5 million before taxes, or 20 cents a diluted share, on new initiatives this year. The new lines of business are helping support the firm’s organic sales growth, which is expected to charge ahead 7 to 9 percent in 2004.

“With so many great programs, I don’t know how we could miss,” said Upbin, pointing to the firm’s many new licensing arrangements. “Even if nothing else grows, we should have that kind of growth.”

While known for proficiently juggling many different businesses at once, even Kellwood may have to take it easy for a while.

“We’re not heroes,” said Upbin. “We know when we should back off some. We’ve added a lot of initiatives.”

Most of the firm’s new projects have been opportunistic, he noted, adding, “You just can’t control the flow. They come when they come and we grab them.”

However, regarding new licensing deals, the ceo acknowledged, “We’re now at a point, clearly, where unless it’s exceptional, we need to digest some.”

But acquisitions, which often operate simply as a new division under the firm’s corporate umbrella, are an exception.

Kellwood also is looking to close at least one more acquisition within the next six months. In February, Kellwood acquired Briggs and last year picked up Gerber Childrenswear.

For the half, earnings catapulted 120.6 percent to $27.5 million, or $1.03 a diluted share, from $12.5 million, or 52 cents, a year ago. Sales during the six months expanded 17.6 percent to $1.22 billion from $1.03 billion a year ago.

For the third quarter, Kellwood is looking for profits of $28 million to $29 million, or $1.05 to $1.10 a diluted share. That still makes for an increase of as much as 24.5 percent over a year ago, before certain one-time items. The consensus estimate from the four analysts polled by Thomson Financial First Call had the firm pegged at profits of $1.17 for the quarter.

Sales for the third quarter are slated to rise to $670 million to $680 million, a gain of as much as 7.4 percent over a year ago.

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