The Rag Trade’s Search for Riches : Apparel Companies Find Investor Interest as Fickle as Fashion
Apparel makers have had an up-and-down year, and we’re not just talking hems. The volatility has been on Wall Street, where lately fashion has been less in vogue with investors than it was a few months ago.
Earlier this year, when the stock market was surging, such big-name labels as Bernard Chaus, Leslie Fay, Carole Little and even the maker of Fruit of the Loom underwear figured that stock in their companies might be as appealing as some of the stock in their showrooms.
After all, Liz Claiborne Inc. had knocked the socks off Wall Street since going public five years ago. And European garment makers and retailers like Benetton and Laura Ashley had seen marketplace magic in the last year.
But just as styles can lose favor in a hurry, so did apparel stocks.
Sizzling Market
Consider what happened this summer to two companies with well-known brands. Heeding a sizzling market for new stocks in general and apparel issues in particular, garment maker Bernard Chaus Inc. went public in July--netting nearly $72 million for the 35% share sold by Bernard and Josephine Chaus, the husband-and-wife founders and owners.
But just three weeks later, the fervor had cooled, and old-line dressmaker Leslie Fay Cos. got doused in an offering of 5 million shares on Aug. 1. The stock closed below its initial price of $18 on the first day out and hasn’t performed well since.
“There is a much less attractive market now than just a few months ago,” said Herman Gordon, an attorney for Leslie Fay, who is also a director. “If I were advising a client in an apparel company about whether to go public, I’d tell him to wait.”
The apparel companies’ experience indicates what a crapshoot the stock market can be, particularly when it comes to initial public offerings.
A company that might seem a sure bet when it files a registration statement with the Securities and Exchange Commission can later turn up snake eyes with fickle investors.
And in the case of the apparel firms, good, steady performance doesn’t seem to be a saving grace.
Outperformed Market
“All of these stocks have gone down without regard to the performance by individual companies,” Gordon said. “It has to do with the mechanics of the market rather than the performance of particular apparel companies.”
Earlier this year, apparel stocks drew attention in the investment community after having materially outperformed the market since the start of 1985, analysts say. The companies’ earnings were growing but not nearly as fast as the stock prices.
“People were willing to pay many times book value for the privilege of owning an apparel company,” said Jay J. Meltzer, an analyst with Goldman, Sachs & Co. in New York.
As a result, garment companies in need of cash to expand operations or pay off debt were coming out of the woodwork. In many cases, these were companies that over the last few years had converted to private ownership through leveraged buyouts that had loaded them up with debt.
In fact, the move to market bucked an apparel industry trend during the first half of the decade toward consolidation and private ownership.
Among the companies that went private were Leslie Fay, sweatsuit maker Pannill Knitting and jeans makers Levi Strauss and Blue Bell. Blue Bell was recently acquired by publicly held VF Corp.
“The reason companies went public (this year) was that there was a window of opportunity,” said Brenda J. Gall, a vice president at Merrill Lynch in New York who has helped put together several apparel offerings. “There was a lot of investor interest in the group.”
Reap Big Profits
Such a climate enables apparel executives to reap big profits for selling relatively small stakes of the companies they’ve built. Meanwhile, they can retain firm control.
Overseas, two companies with strong U.S. presences also scored big on public markets.
More than $100 million went to the Benetton family of Treviso, Italy, after an offering on the Milan Stock Exchange that left them with nearly 90% of the company.
Late last year, Laura Ashley Holdings, another manufacturer and retailer, went public on the London Stock Exchange, providing a $55-million windfall to survivors of Laura Ashley, who died two months before the offering. The Ashley family and its holdings still control 72%.
To be sure, apparel companies have accounted for only a fraction of this year’s initial public offerings on U.S. markets.
Through August, 542 offerings in an array of industries had raised nearly $13 billion, eclipsing an annual record of $12.95 billion set in 1983, according to the Institute for Econometric Research in Fort Lauderdale, Fla., which publishes the New Issues newsletter.
But the garment makers were a high-profile group because their products deck the closets of so many Americans.
Moreover, there is an interesting common element in many of these companies, which are run in highly distinctive fashion by relatives of the founders or by the husband-and-wife teams that started the businesses.
Any of these companies would do well to emulate pioneer Liz Claiborne Inc., which has been a stellar performer since its $19-a-share offering in 1981.
The New York-based company was started 10 years ago by designer Claiborne; her second husband, Arthur Ortenberg, and two other partners. Last year, it reported an astounding 44.6% growth in net income, to $60.6 million, and a 42% increase in sales, to $557 million.
This year, its stock split for the fourth time in less than five years. At the annual meeting in May, shareholders gave designer Claiborne a standing ovation.
“It’s the greatest success certainly in the industry,” analyst Meltzer said.
Claiborne decided to strike out on her own after failing to persuade her employer, Jonathan Logan, to start a career apparel line. She quickly became a legend by offering designer clothes for working women at moderate prices. Department stores routinely house enormous Liz Claiborne departments.
The company recently announced plans eventually to open a chain of specialty stores that will sell a new apparel line under a name other than Claiborne.
Public ownership “has given us exposure that we would not have had,” Claiborne, 57, said last week in a brief interview at the J.W. Robinson store in Woodland Hills, where she introduced a new fragrance line.
Going Wasn’t Easy
“I was afraid that the responsibility to shareholders might be a burden, but we . . . determined that we would always put the business first and that (shareholders) would benefit. And that has been true.”
The going wasn’t easy at first, however.
“The time we picked (to go public) was probably as difficult a time as we could have asked for,” Jerome Chazen, a founder and co-chairman, said in a telephone interview from New York.
“In 1981, the market was not very friendly toward apparel stocks. There hadn’t been an apparel company going public in about 15 years, and Wall Street had been burned” by a rash of stocks that didn’t hold up, including Puritan Fashions, Jonathan Logan, Bobbie Brooks and Leslie Fay (the company traded on the New York Stock Exchange from 1976 until a 1982 leveraged buyout).
Taking into account stock splits, the company noted, an initial $19 investment would today be worth $444. The holdings of Liz and her husband reportedly are worth more than $200 million. In over-the-counter trading Friday, the stock closed at $38.25.
One year older than Claiborne’s company but an infant in the market is Bernard Chaus Inc. Chairman Bernard Chaus, 57, had already twice retired from the apparel industry to pursue his passion--bicycle riding--when he happened to encounter an acquaintance, Josephine Augello, 11 years ago in New York’s garment district.
A buyer for a New Jersey specialty store, Josephine soon convinced Bernard that there was a void in the market for updated, moderately priced apparel. The two invested $70,000 in a business, which quickly took off.
Proposed Marriage
After about a year and a half, Josephine, now 35, expressed interest in buying some stock in the company, but Bernard successfully proposed an alternative: marriage and a full business partnership. Last month, just weeks after their lucrative public offering, the partners reported that earnings for the 1986 fiscal year ended June 30 soared to nearly $20 million from $180,000 the year before. Sales grew 46% to $279 million.
“We’re in the most dynamic part of the industry right now,” Bernard Chaus said. “People want fashion merchandise at moderate price points.” Chaus recently announced a sportswear line to augment the career and casual businesses.
By selling a 35% stake to the public, Chaus now has funds for growth, noted Edward F. Johnson, an apparel analyst with Johnson Redbook Service in New York. He estimates that growth will come at a minimum rate of 25% for the next several years.
Jerard L. Less, a New York consultant to the apparel and retail industries, said Chaus “slipped in under the wire” in its public offering. “They’re smart people and will use the capital well,” he added.
The offering also earned husband and wife $35.9 million each. Last week, the Chauses got a call from Forbes magazine, which is compiling its list of the 400 richest people in the United States. “Yes, we will be in their October issue, I guess,” Chaus said.
Chaus Inc. stock, which for a time traded at several dollars above its offering price, closed Friday on the New York Stock Exchange at $17.25.
Just weeks after the Chaus offering, the apparel bubble burst for Leslie Fay, a company that came full circle after a convoluted history of public and private ownership. “The timing was bad,” said analyst Meltzer of the company’s $18-a-share offer.
Even so, by selling a 25% stake, the company raised about $84 million that was immediately used to pay off debt incurred in two leveraged buyouts, in 1982 and 1984.
However, the lack of enthusiasm for the offering precluded a hoped-for bonanza for company principals who had intended to sell some private holdings. The executives include Chairman John J. Pomerantz, son of the late Fred Pomerantz, who founded the concern in 1947. John’s wife, Laura, heads the company’s Breckenridge division.
The company, a leading producer of moderate and better dresses and sportswear with a history of steady growth, reported earnings of $10.9 million in the latest fiscal year, on sales of $475 million. Like Chaus, it recently announced a new sportswear line that attorney Gordon said “probably will be higher-priced” merchandise.
Although Gordon acknowledges that the company faces a fast-changing, difficult business climate, he said Leslie Fay’s position as a major resource for stores “gives it an edge” over smaller competitors.
Consultant Less, however, views the company’s “highly fragmented” divisions as a minus. “Consumers may have heard of Leslie Fay, but that name won’t necessarily be on the garments,” he noted. Among the company’s brands are Kathryn Conover, Castleberry Knits, Joan Leslie, Shapely and Outlander.
In New York Stock Exchange trading, Leslie Fay shares closed Friday at a new low of $12.125.
Even though some observers contend that the glamour period for apparel offerings has passed for now, other companies are waiting in the wings on Wall Street. Farley Apparel, maker of BVD and Fruit of the Loom underwear, has filed a registration statement with the SEC.
Sales Expected to Rise
And Los Angeles designer Carole Little’s company, which makes the Saint-Tropez West line, is observing a “quiet period” that is normally prelude to an offering. Her husband, company Chief Executive Leonard Rabinowitz, has said the company expects to hit $55 million in sales this year, up from $44 million in 1985.
In a recent Women’s Wear Daily story, Rabinowitz played down the West Coast operation. “Yes, we’re a California company, because we ship from Los Angeles, but we’re really a New York firm. If we’re going to talk to Allen Questrom, chairman of Bullock’s, we meet him in New York, not Los Angeles. . . . We just feel that serious business is done in New York.”
Nevertheless, the company said it plans to more than double its Los Angeles facilities.
Little’s signatures are soft silk, prints and two-piece dressing at moderate prices. About half of the products are made in Los Angeles, with the rest in Hong Kong.
Many other U.S. companies, including Claiborne, go overseas for as much as 85% of their clothing.
Despite the market’s unsettling declines of late, Meltzer of Goldman, Sachs continues to be bullish. “I feel that apparels have taken a pretty good hit and that the price-earnings multiples have corrected themselves to more realistic levels,” he said. “So I’d be constructive. If they priced the product at a realistic level in line with comparable opportunities, they could certainly still go public.”
