Will Mossimo Surf Back into Style?

Like polyester and platforms, Mossimo is in for a battle to return to fashion's forefront.
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, the once-hot clothing manufacturer that was booted from investors' A-list in 1997 when sales and profits collapsed, has seen its stock come back in recent weeks.

Shares of the Irvine, Calif.-based company soared almost 400% this month to a 52-week high of 14 5/8 Monday after trading around 3 for months. On Tuesday, shares eased back to 11 3/4.

While bulls are betting that a new management team can reposition Mossimo on the financial runway, skeptics question the company's ability to once again become a glamorous brand, in part because its cash position is less than extravagant.

Earlier this month, Mossimo hired Edwin Lewis as president and chief executive to replace John Brinko, whose contract expires Dec. 31. Lewis, who most recently served as

Tommy Hilfiger's


chairman and CEO, convinced four senior Hilfiger executives to follow him. Gia Castragiovanni will serve as executive vice president; Jerry Robertson, vice president of design; Carol Hauer, vice president of production; and Jim Justis, vice president of international licensing and retail development.

Lewis received more than 5 million stock options, or roughly 35% of the company, as enticement to leave his secure post. Even better: Most of these options can be exercised immediately. Before even lifting a finger, Lewis added an estimated $40 million to his net worth.

Giannulli Mossimo, the company's founder and chairman, forked over half his personal stake of 10.3 million shares to recruit Lewis. The two men now have equal ownership of the company.

Giannulli started his company with a $100,000 loan from his father in 1987 to make T-shirts, neon shorts and other surfer wear. By 1996, the year Mossimo went public at 18 a share, annual sales had soared to $109 million.

But the company ran into trouble when it shunned its surfer roots and aspired to a more upscale clientele. It began selling $500 suits in department stores and introduced a line of women's clothing. Following other fashion brands like

Polo Ralph Lauren

(RL) - Get Report

, it licensed its name to products ranging from ladies' swimsuits to men's ties. The strategy bombed.

In 1997, Mossimo lost $18.7 million, or $1.25 a share, on sales of $71 million. That compared with profits of $13 million, or 84 cents a share, on sales of $109 million in 1996. The

First Call

consensus for this year is a loss of 54 cents per share.

A Mossimo spokeswoman blames the performance on poor execution by suppliers. "Mossimo had problems with sourcing agents, where product wasn't delivered on time," she says. In one case, a supplier told Mossimo a week before a shipment was due that it couldn't deliver, the spokeswoman says. As a result, "Mossimo couldn't deliver to retailers on time."

Now Mossimo wants to get back in the good graces of department stores. To that end, the company has ended relationships with unreliable suppliers and focused more on upscale sportswear -- a staple of department stores. Mossimo also has cut costs by trimming its workforce and streamlining product offerings. The company will save $740,000 annually by moving its corporate headquarters.

Despite these strides, one person who is short the stock says the company will have a tough time regaining its legs. He points to reluctance on the part of department stores to support small manufacturers and wonders where Mossimo will get the money to fund its resurgence.

Michael Exstein, an analyst with

Credit Suisse First Boston

, agrees, adding that "Department stores are becoming more and more focused on fewer areas."

Exstein says department stores will embrace smaller manufacturers, but they must focus on a specific niche supported by strong demand. For example, major department stores have warmed to


, a privately held maker of street apparel, to lure urban youths who favor the brand.

But most consumers would be hard-pressed to say what Mossimo stands for or how it differs from other clothing manufacturers.

"I have no idea what Mossimo's clothes look like," says Amy Wistreich, a 29-year-old working mother of two in Westchester County, an affluent New York suburb. She counts Ralph Lauren among her favorite designers.

Another hurdle for smaller manufacturers attempting to penetrate department stores is a slippery game that requires clothing makers to pay department stores "mark-down" money when their goods fail to sell. In this way, department stores protect their margins, and large manufacturers usually have deep enough pockets to foot the bill. But the practice can leave smaller companies in a tight spot.

And Mossimo appears to be tight on cash. In its most recent quarter ended Sept. 30, the company had $97,000 in cash and $1.4 million in receivables. Working capital declined to $7.2 million from $13.5 million Dec. 31, 1997. The company has a $15 million credit line, of which $4.9 million is still available for borrowing.

"How much inventory can you build on $5 million?" says one New York money manager who is short the stock. "You can't turn a company on that sum of money unless you raise more elsewhere."

Since Mossimo's credit facility allows the company to borrow against its assets, mainly receivables, inventory and equipment, which totaled about $15 million at the most recent quarter's end, the company may be forced to seek funding from other sources, this person says. And the short-seller is skeptical that Mossimo will find a warm reception in the public markets, considering the stock's long-term performance.

Mossimo's spokeswoman declined to comment on the company's cash position or its fund-raising efforts.

Investors waiting for the company to announce its online debut, as one poster noted on a

Silicon Investor

message board, shouldn't hold their breath. The company's Web site boasts that Mossimo is coming this fall. "This fall" turned out to be this



"It's a work in progress," says the spokeswoman.

That seems to be Mossimo's mantra.