WILL PEGASUS FLY? RUZOW MAKES CASE FOR MULTIBRAND PLAN
Byline: Miles Socha / With contributions from James Fallon, London / Luisa Zargani, Milan / Katherine Weisman, Paris
NEW YORK — Standing at a rack of Pamela Dennis dresses, Stephen L. Ruzow grabbed a simple black slip style and held it aloft.
“We could sell 50 of these and then cut 50 more,” he said. “You can easily add $2 million or $3 million to a business just by having the right inventory.”
For Ruzow, as chairman and chief executive of the Pegasus Apparel Group, the impromptu dress lesson is emblematic of what will make his fledgling conglomerate tick. By providing not only capital, but also management, marketing and production expertise, the group will be able to help underfinanced businesses increase their sales, he said. Funding and producing inventory, something small, independent designers are often incapable of tackling, is one simple means of doing that. The ultimate goal, of course, is to make more profitable all of Pegasus’ holdings, which so far include Dennis’s eveningwear business, Daryl K and Miguel Adrover.
In an exclusive, wide-ranging interview with WWD, Ruzow addressed some skeptics’ concerns about Pegasus that have emerged since it stormed onto the American fashion scene only two months ago. One issue is that the group will have trouble quickly recouping its investments from what some have already derided as a hodgepodge of niche labels.
Nonsense, countered Ruzow, asserting that each of its partners has put a solid, three-year plan in place with growth and profitability as the ultimate outcome. He said each of the businesses it controls has the potential to generate $40 million at wholesale within five years.
“If we don’t see that the return is there after three years, we won’t do the deal,” he said. “If we agree on the business plan, we agree on the stores we plan to sell to, licensing and on freestanding stores, if any. The hard part is done first. It’s a very easy way of knowing if we picked the right partner and the designer is right for us.”
Indeed, Ruzow argued that the timing is perfect to bring upstarts like Adrover and underdeveloped businesses like Daryl K to a broader stage.
“Walk into any department store in this country and you’ll find the same thing: They’re dominated by the megabrands,” he said. “The amount of real estate devoted to those brands is staggering, yet they’re no longer generating sales and making plans. It’s a tremendous opportunity for new or relaunched designer brands. The stores are very excited about being able to diversify their offering to the consumer.”
As for recouping its investments, Ruzow said the group has the flexibility to take any branded company out of the group and sell it to a strategic investor. Other possibilities include selling the entire group, or, “we could go public if we felt it was the right time.”
And since Ruzow has roughly a dozen years before he has to return the apparel group’s funds to the parent, “we’re not under any time pressure.”
Still, Ruzow has wasted scant time in striking several high-profile deals. Securing Adrover as a partner, over a number of other high-profile suitors, which included LVMH and the Italian holding company HdP, was considered a coup for Pegasus and a move that will doubtlessly generate torrents of publicity for the group.
As Christopher Everard, a London-based luxury goods consultant, noted, the key to any multibrand portfolio is a big-name designer that will generate excitement at the group. “Luxury fashion and ready-to-wear is rock ‘n’ roll today and you need a name,” he said.
Ah, but here already is the “L-word:” luxury. It has proven to be a thorn in Pegasus’ flank. Since the moment the group was conceived, it has frequently been compared to European luxury conglomerates, including LVMH Moet Hennessy Louis Vuitton, Gucci Group NV and Prada Group. Ruzow acknowledged that there are similarities, and Pegasus as an upstart, has found the shorthand of “luxury group” useful to convey its intentions to new partners and prospective employees. But it has also made Pegasus vulnerable to criticism from many European analysts, who are loath to call any American designer firm a luxury entity, preferring to describe their positioning as prestige brands or “status volume” brands.
Ruzow would have little argument with them. “We are not a luxury goods conglomerate,” he said emphatically. “We’re a multifaceted company.”
Like LVMH, Pegasus plans to have a variety of holdings in fashion, beauty and accessories. Ruzow said his goal is obtain majority stakes in 10 companies in the next two years that will do roughly $400 million in total volume. “I think it’s really doable,” he said.
As reported, Pegasus is in negotiations with designers Cynthia Rowley and John Bartlett. Ruzow said he expects to complete four to six deals by the end of the third quarter and not all of them will be clothing-driven companies. While declining to identify any acquisition targets, Ruzow listed footwear, swimwear, accessories and beauty firms among the possibilities. It is believed that at least four of the companies Pegasus is courting are based in California, where Ruzow has been spending a great deal of time.
Fascinated at the prospect of a footwear deal, Ruzow said Pegasus would not only have the opportunity to expand a firm’s existing franchise, but it would bring a stable of potential names for licensing. Dennis is hot to launch a footwear line, as is Adrover and Kerrigan. Ruzow acknowledged that manufacturers of other product categories it acquires, say a footwear or beauty firm, might not be ideal partners for all of its brand holdings. However, there are clearly margin advantages if it controls at least some of the brands manufactured by a majority-owned firm.
Pegasus has emerged on the international fashion scene at a time when multibrand firms are proliferating. Last year saw Prada and Gucci morph from single-brand powerhouses into LVMH-style competitors. Prada acquired majority stakes in Helmut Lang, Jil Sander and Church & Co. Gucci, meanwhile, acquired Sanofi Beaute, which includes Yves Saint Laurent fragrance and fashions, as well as Sergio Rossi and, most recently, Boucheron. The latest surprise entry into the multi-brand fray is the jewelry firm Bulgari, which last month announced plans to acquire up to 12 medium-size Italian companies in the fashion, interior design, tourism, retail and food sectors, backed by funds totaling up to $200 million.
Meanwhile, American designers, from upstarts to established firms, have been quick to glom on to the latest deep pocket to arrive on the fashion scene. Ruzow said he’s been deluged by “dozens” of companies interested in partnering with Pegasus. One day last week, four proposals arrived in the mail for him to scrutinize.
The investors operating under the name Pegasus include Union Square Partners, an investment bank headed by Seth Bogner, and Ruzow. Pegasus Apparel Group operates with assets from an $800 million private equity fund operated by the Greenwich, Conn.-based Pegasus Capital Advisors, a money manager for institutional investors such as corporate pension plans. One of its funds recently completed the acquisition of Equal sweetener for $570 million.
As reported, Pegasus is looking to acquire companies with between $10 million and $20 million in revenue and strong international growth potential. However, it may also buy a company in the $200 million to $300 million range, which would become the anchor for the group and be reflected in a new corporate name.
Industry consultants and luxury analysts say it’s too soon to predict the prospects of Pegasus Group. Most acknowledge its potential, provided it assembles the right mix of brands, guards the individual culture of each firm and leverages the economies of scale.
Carlo Pambianco, a Milan-based luxury goods consultant, said he approves of the portfolio approach that has also swept other sectors, including chemical, food and automotive industries. Multibrand entities can exploit “common synergies in retailing, distribution and communication,” he said. For example, he said Prada’s established presence in Asia will be a boon for the group’s other brands.
But the formation of yet another multibrand fashion enterprise gives pause to some analysts, who have yet to be convinced that the portfolio approach in fashion is a proven formula.
John Wakely, a luxury goods analyst at Lehman Bros. in London, is one such critic. In January, Wakely raised the ire of Gucci Group management when he downgraded its stock based on the assertion that “we have yet to witness a demonstration of the benefits of ‘portfolio’ luxury goods companies.”
In a recent interview, Wakely reiterated his belief that groups might have short-term growth potential, but are destined to fail over time.
“I was a consumer goods analyst before this and the multibrand format didn’t work for Unilever and Diageo and it’s not working in luxury goods,” he said. As reported, LVMH recently trimmed its stake in the liquor giant to 3 percent from 6.5 percent.
What concerns Wakely is that many of these groups are going outside their core competencies in their expansion drives. For example, LVMH’s holdings span everything from cognac to ready-to-wear to discount fragrances to nail polish.
Gucci’s purchase of Yves Saint Laurent concerns Wakely because YSL is effectively a fragrances business, which is not Gucci’s core competency, and because group creative director Tom Ford, in attempting an image overhaul of YSL rtw, might take his eye off the ball at Gucci.
“A multibrand strategy is not a necessity,” agreed Jacques-Franck Dossin, a luxury analyst at Goldman Sachs & Co. in London. “From a financial or earnings point of view, there are only small gains from potential synergies. There are few gains in production or distribution, but you can have positive financial synergies in things like ad space buying or logistics.”
Specific to Pegasus, one consultant questions its ability to get a quick return on its investments.
“The approach taken by Pegasus is a risky one,” said Harry Bernard, partner and chief marketing officer at Colton Bernard Inc., an industry consulting firm based in San Francisco and New York. Specifically, he said the brands Pegasus has acquired to date address young consumers, typically the most fickle ones when it comes to fashion. “The types of brands being acquired have yet to achieve desirability with a significant sector of the consuming public,” he said.
Analysts concurred with Ruzow that Pegasus cannot be considered a luxury group, but rather a holding of prestige brands.
Everard, the London-based consultant, suggested Pegasus should structure its operations along the lines of the classic American department store.
“What is a department store but a multibrand platform?” he asked. “When the U.S. department store structure was at its most dynamic, it was immensely successful. Pegasus could learn a lot from that model and the brands it selects could literally fill American department stores.
“If Pegasus doesn’t make the mistake of pushing its brands together, it has a good chance.”
Analysts agreed that the key benefit of a multibrand enterprise is a solid one: Since fashion is an erratic business, it behooves a firm to have several brands with different positioning to balance the risk, just as a manager of an investment portfolio seeks a variety of holdings.
Ruzow couldn’t agree more. “Our strength is our diversity,” he said. “We’re not all high end.”
He noted that “we’re not going into channels of distribution that are not my area of expertise” insofar as the distribution will likely range from Neiman Marcus down to department stores like Macy’s and Dillard’s. Still, Pegasus will likely have a wider range of customers than European groups that are focused exclusively on the luxury tier.
“I don’t think there’s a floor in Bloomingdale’s that I wouldn’t want to have a product to sell to,” he said. “What we are all about is finding the best brands in each segment of the marketplace. We want to have great brands in designer, in bridge, in contemporary and other departments.
“The model that we have is to find great talent and give them what they need to grow their businesses.”
Adrover is a perfect example. Famously impoverished, his dank, East Village basement apartment endlessly described in scores of magazine profiles, the Spanish-born designer cobbled together his breakthrough fall 2000 collection with donated fabrics and the free labor of scores of collaborators. Now working on his spring 2001 line, Adrover was dispatched by Pegasus management to Florence and Como, Italy, to meet with some of that country’s best fabric suppliers.
Ruzow proudly related that a representative from one fabric house drove more than four hours to meet with Adrover and another, a 315-year-old supplier to only five designers worldwide, signed on its sixth customer after meeting with Miguel.
“We offer an entree to the best mills, factories, yarns, suppliers and even factors,” he said. “It’s really the designer’s dream come true.”
It takes time and money to turn those dreams into business, however, and Ruzow acknowledged that the investment community has been loath to place its money on apparel ventures, preferring dot-coms and technology stocks.
Armando Branchini, a luxury goods consultant and vice president at InterCorporate in Milan, agreed, saying investors are in a “take and run” mode, rather than waiting on profits by keeping shares for a long time.
Jonathan A. Lucas, senior vice president at the factor CIT Group/Commercial Services in New York, noted the dearth of venture capital in the apparel industry, which generally offer single-digit gains. “Venture capitalists invest in growth companies,” he said. “There are very few opportunities for growth there.”
But Ruzow asserted that Pegasus differs from pure financial investors insofar as it is able to provide not only funds, but management expertise at the corporate and company levels. He said the hiring of former DKNY division presidents Mary Wang and George Ackerman as presidents of Daryl K women’s and men’s respectively will help transform Kerrigan from a cult favorite to a commercial powerhouse.
With Kerrigan, as with its other brands, Pegasus brings management expertise to allow companies to break into international distribution, licensing and freestanding retail. “We bring a lot of credibility to the table in terms of being able to assure the stores that the product will be delivered on time,” he said. “It’s not just about money. You cannot just put money into a company and say it’s going to be a success.”
For example, he said, “it helps knowing the ceo of every major retailer in the world. That helps a lot.”
Karine Ohana, principal in MediaInvest in Paris, would agree. She said the success or failure of a multi-brand strategy comes down to the human resources involved and their ability to preserve the culture of the various fashion concerns it controls.
“When you see a strong person that can pull a team together like a soccer team and who gives managers the opportunity to bloom, that’s when it can really work,” she said. “Think Arnault. Think Yves Carcelle. Arnault understood that in creativity or management, a company is successful when you let it breathe. People have to be able to express themselves at all levels.”
Ruzow has repeatedly stressed his intentions to leave the designers in his stable free to do what they do best, with their own design, sales and merchandising staff. Not that there aren’t fiscal expectations attached.
“We want to build Miguel as Miguel, not Miguel for somebody else,” he said. But then he quickly added: “Miguel has made his statement, and now he wants to sell.”