For fashion and apparel companies, 1998 read like a catty gossip column.
Did you hear what happened to
? Asia whacked the poor dear. Oh, and
lost her battle with saturation.
took a nasty fall. Meanwhile,
headed for splitsville -- calling off their licensing deal.
Sure, there were bright spots like
Pepe Jeans USA
Tommy Hilfiger Canada
, which boosted the company's growth rate just as its men's business was slowing. But even that deal was tainted by the slippery nature of the garment business -- where insider transactions are the norm and executives pay themselves penthouse salaries even if their stocks are slumming. Since Tommy Hilfiger's executives also owned stakes in Pepe Jeans, they basically bought the company from themselves. (The company notes that the deal was approved by independent legal and financial advisers.)
As long as executives are lining shareholder pockets along with their own, such cozy dealings are overlooked. Not so when stocks stall.
Fashion and apparel companies "sucked in 1998," says Suzanne Zak, president of
in Minneapolis. "These companies are driven by a handful of executives with strong personalities. These executives are paid
in a way that wouldn't be tolerated in any other industry."
That's why Zak gives managers a thorough grilling before buying an apparel stock. One of the few who pass muster: Linda Wachner, who runs Warnaco and
. Zak also makes an exception for Tommy Hilfiger, owning that stock because it was one of the few apparel companies to beat the
S&P 500 Index
But all the blame for mucking up a year that turned out to be stupendous for the broader market can't be heaped on apparel executives alone. The fashion business -- always a tough one since it's precariously perched atop changing consumer tastes -- is getting tougher. Apparel's main distribution channel, department stores, is experiencing atrophy. Consolidation has created fewer department store companies, leaving apparel manufacturers with fewer potential customers. And sales at department stores are growing only moderately. Meanwhile, the Internet, which is not well-suited to selling fashionable and often-expensive clothing, has for the most part left these companies behind. And while economists aren't predicting a recession, many expect the consumer will slow down in 1999.
All this negative sentiment has left apparel stocks depressed. Most trade at a discount to the broader market. And some are below where they traded during the last recession, notes Todd Slater, an analyst with
. He calls this unwarranted since earnings estimates have been trimmed only marginally -- between 5% and 10% for certain companies.
With investors snubbing these stocks, what's a natty fashion exec to do? Book a few extra sessions with the therapist (read: investment banker), who will tell them to shop 'til they drop, even if it means buying their own company back from the public. Analysts and investors expect consolidation and leveraged buyouts to burgeon in '99.
Let's Get Together
A smattering of deals were completed last year with Tommy Hilfiger buying two companies,
. But Slater says that's just the tip of the iceberg.
"There are hundreds of manufacturers that will consolidate into less than 20," he says, adding that the most likely acquirers are those with about $2 billion in revenue, including Warnaco, Jones New York, Liz Claiborne, Tommy Hilfiger, Polo Ralph Lauren and Kellwood. Potential takeover targets include hundreds of smaller public and private players.
But with acquisitions come the added chore of integrating two companies, which can prove thorny for even the best managers.
"As an industry, these companies have a mixed record of executing their basic business plan," money manager Zak says. "When you layer an acquisition on to that, it adds risk."
Another trend industry watchers expect to see is leveraged buyouts. Many apparel companies came public in the past few years as a way for the founders to cash out. But today with Wall Street valuing the group at a discount, their stakes are worth substantially less. These executives could profit more by owning the companies outright. Also, depressed stock prices could inhibit a company's ability to make acquisitions, which would limit its growth.
"Then it seems you're missing two important reasons to be public," Slater says. "With multiples at these levels, I expect to see more LBOs."
The management of
St. John Knits
, which happens to be family-run led by Chief Executive Bob Gray, has already offered to buy the company for $28 a share -- kicking off what may be the first of an LBO wave.
But LBOs carry an inherent conflict of interest. Executives, who are privy to inside information, may not have shareholders best interests at heart. Already several lawsuits allege St. John's management is low-balling investors.
Ralph Wanger, chief investment officer of
Wanger Asset Management
in Chicago, who bought St. John shares this past year when they traded around 40, says the offer is too low. "One could argue that 28 is a price that the market has seen fit to exceed in the last three years by a substantial margin," he says, adding that he isn't suing the company.
A spokesman for St. John Knits says an independent committee is evaluating the offer's fairness.
Of course, fairness depends on your objectives. For shareholders who want to cash out of underperforming stocks quickly, a LBO typically provides a better premium than selling shares on the open market.
"Do shareholders lose out?" asks John Jarres, portfolio manager with
in Denver, who has traded many of these stocks the past year, although he doesn't hold a position in St. John Knits. "Potentially, yes. But the market hasn't been willing to put a decent multiple on these stocks in a long time."
Then again, certain apparel companies should never have been public in the first place. No matter that many sold shares to the public for the first time recently at higher prices than where these stocks trade today. It seems bankers and politicians think alike. Investors, like American voters, won't remember.
You can almost hear the banker whispering in the ear of (name of major designer goes here): You're an artist. You shouldn't have to answer to pesky investors. Wall Street will never appreciate your talents. You're options package isn't worth the costume jewelry around your neck.
That's why some investors, who bought into the glitz and glam, will steer clear of the group this year.
"We've suffered enough," says Zak. "We don't have that high a pain threshold."