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The Rise and Fall of Mossimo Giannulli

TIMES STAFF WRITER

Calvin Klein’s empire nearly collapsed under a mountain of debt in 1992 before record producer David Geffen came to the rescue. Tommy Hilfiger went bankrupt before teaming up with Hong Kong apparel mogul Silas Chou to build the giant fashion house that bears his name today.

But even in the topsy-turvy world of fashion, few falls have been as dramatic as that of Mossimo Giannulli.

Two years ago, the Irvine menswear designer was the toast of Wall Street. Shares in his newly public company soared to $50 from $18 in a few months on the belief that he could indeed fulfill a personal dream of becoming the next Calvin Klein.

Today, Mossimo Inc. is like the scraps of discarded fabric on the company’s cutting-room floor. Its stock has plunged to $4.75 a share on the New York Stock Exchange, and the company that reported a $12.6-million profit for 1996 last week disclosed that it lost a whopping $18.7 million for 1997.

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Giannulli’s biggest misstep, according to fashion experts, retailers, Wall Street analysts and competitors, was trying to make the leap too quickly from a beachwear company to a top-drawer designer.

“He enjoyed so much success so early that I honestly don’t think he knew how long and how hard of a transition that is to make,” said Sandy Potter, co-owner of Directives West in Los Angeles, which advises major department stores on California fashion trends. “I always believed he had the talent to make it happen, but that’s the kind of thing that takes 10 years to accomplish, not two or three.”

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In moving to the upscale market and expanding into women’s wear, Giannulli walked away from the business that made him rich and famous. Starting with a line of neon-colored volleyball shorts and T-shirts, Giannulli’s company grew from a garage operation in 1987 into a $72-million annual enterprise in eight years. When the company went public in February 1996, 60% its sales stemmed from casual menswear such as shirts and shorts.

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Today, only 27% of sales are derived from casual clothing, the remainder coming from finer men’s and women’s wear sold primarily to department stores. The transition has left customers confused.

“In the recent past our orders have dropped off, but we still have customers who want the Mossimo name,” said Carrie Myklebust, Orange County sales promotion director for Nordstrom.

Unlike Klein or Hilfiger, who rebounded with the help of wealthy backers, the 34-year-old Giannulli plans to work his way back alone--the same way he soared to the top. He has spurned at least two buyout offers.

For Giannulli, who declined to be interviewed for this article, the steep fall from fashion’s dizzying heights has been a bone-jarring experience, according to friends.

“It has had a great effect on him personally,” said Susan Crank, chief executive of Anaheim-based Lunada Bay, which makes Mossimo swimwear under a licensing agreement. “But it has focused him that much more on getting his business turned around.”

But competitors and critics wonder if Giannulli, who has continued to portray an image of defiance and arrogance during his company’s downhill slide, has learned anything from the experience. In announcing that he had surrendered the chief executive job Thursday, Giannulli declared he was taking on the new title of “Visionary.”

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No one disputes that Giannulli has a keen eye for what young people want to wear.

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“Creatively speaking, he’s an absolute genius,” said Crank, a 20-year fashion industry veteran. “Moss has been one of those guys who has been consistent in his design and marketing philosophy, and that’s something that makes him stand apart from the crowd.”

But creativity is only half the equation. The other half is execution, and Mossimo stumbled badly in that area while attempting to make the jump to fashion’s big leagues.

“It’s really important that you have the right infrastructure--good accounting and inventory systems, a big warehouse, sales reps who know how to service the stores--to support all that new growth,” said Bob McKnight, co-founder and chairman of Quiksilver, a Costa Mesa surf wear designer.

The differences between working with surf and specialty shops and with department stores are vast.

If an order sent to a surf shop isn’t 100% correct, “a lot of times they’ll just shrug and sell what you sent them,” said McKnight, whose company is one of the few that successfully broke into the department store arena while remaining a leader in beachwear.

Department stores, however, have inches-thick books on exactly how, when and in what condition they expect to receive merchandise. If those specifications aren’t met, the supplier is hit with what are known as charge-backs, deductions of up to $50 for each violation.

Once merchandise reaches the selling floor, department stores expect it to sell at a predetermined level. If it doesn’t, “they’ll want you to take markdowns or take the merchandise back,” McKnight said. “Suddenly, on a $10,000 order that hasn’t gone smoothly, you’re looking at a bill for $1,000 and your profits are gone.”

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Giannulli learned all of these lessons the hard way in the fourth quarter of 1996, his first holiday season as head of a public company. The company was late in launching a new women’s line, which arrived in stores late in the holiday season, forcing the company to take markdowns.

What should have been the most profitable quarter of the year became the worst. The company earned a mere $548,000, one-fifth of what it earned for the same period the previous year and less than half what analysts had been expecting.

Mossimo also was ill-prepared for the transformation from a private company to a publicly traded one.

At the time of the stock offering, none of Giannulli’s senior executives had been an officer of a public company--forced to meet Wall Street’s quarterly earnings expectations or pay the consequences. All but one was in his early 30s, and two of them had been with Giannulli almost since the day the company was founded.

To compound matters, there was no oversight from an independent board. Mossimo had only two directors, Giannulli and Eric Hohl, who joined the company in 1991 as controller after a two-year stint as a consultant for Kenneth Leventhal & Co., an accounting firm that specializes in real estate.

Yet many analysts gushed over Giannulli and the company’s prospects. David Rose of Jefferies & Co. in Los Angeles was one of the few who was skeptical. “I would be very cautious about putting my own money into the company until I had a better feel for what it could do long-term,” he warned weeks before the stock offering.

Nevertheless, Mossimo’s first earnings report as a public company--in May 1996, for the first quarter--was terrific, with profit rising 21% on strong sales of its menswear lines. The stock, which had doubled to $37 in its first three months of trading, catapulted to an all-time high of $50 a month later. That landed Giannulli on the 1996 Forbes 400 list of richest Americans, his 70% stake in the company worth $490 million.

In reality, the company was about to come apart at the seams.

Mossimo was venturing into the competitive and unpredictable world of women’s wear, and Giannulli, realizing that he needed more management expertise, brought in Tony Cherbak, a partner at the Big Six firm of Deloitte & Touche. Cherbak is a widely respected apparel industry expert with 18 years of experience advising public companies.

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Almost immediately, Cherbak clashed with Hohl, the chief operating officer, whom he viewed as inexperienced, and national sales manager Don Kerkes, whom he viewed as ineffective, company insiders said. Both joined Mossimo during the company’s heyday, when orders were flying in the door and the company couldn’t deliver its products fast enough.

On one occasion, Kerkes informed Cherbak that the men’s division was going to miss a sales target by nearly $20 million. The normally low-key Cherbak--whose job was to keep Wall Street apprised of the company’s financial progress--"went completely ballistic,” an insider said. At Mossimo, “these guys never really had to sell before, so when things slowed down, they didn’t know what to do. And it was Tony’s reputation that was on the line.”

Frustrated by his colleagues’ inability to boost sales, Cherbak resigned last May after only eight months, citing personal reasons. He declined to comment for this article. Hohl and Kerkes declined interview requests.

Over the next six months, dozens of other employees, including Hohl and Kerkes, followed Cherbak out the door as the company’s financial condition continued to worsen.

In a series of increasingly dismal earnings reports over the last nine months, Mossimo blamed its woes on everything from cost overruns on sample lines to missing inventory to shrinking sales.

Many in Orange County’s apparel industry aren’t sorry to see that Giannulli has fallen on hard times.

“Because he took the direction to go into fashion, a lot of the industry didn’t understand that and felt he was thumbing his nose at them,” said Court Overin, director of the Action Sports Retailer Trade Expo, a twice-yearly apparel show.

Although Giannulli got his start making volleyball shorts, his look was never really a surf one. He quickly moved more into the street wear genre ruled by the likes of Shawn Stussy, a more established designer in Laguna Beach.

But some thought Mossimo’s style looked too much like Stussy’s. The scripted logos of the two companies, for example, were strikingly similar. Stussy purposely kept his company small and his distribution limited, but Giannulli wanted to grow, and he found open-armed merchants who couldn’t get their hands on Stussy apparel. Industry insiders began to refer to Giannulli as “Stussimo.”

Giannulli branched out into menswear and soon became a fashion superstar. Fans crowded into department stores to get his autograph. He ran around Hollywood with actor Stephen Baldwin, played a hunk in Janet Jackson’s “You Want This?” video and dated television actress Lori Loughlin. The two were married on Thanksgiving Day in 1997.

Last month, Giannulli put his $3-million Laguna Beach mansion and $10 million worth of property overlooking Newport Harbor up for sale. His real estate broker said he is moving to a $1.2-million home he purchased in Bel-Air last year.

Friends say Giannulli’s cockiness is mostly an act designed to enhance the company’s image. They say that many of Giannulli’s deeds go overlooked, like enlisting several of his Hollywood pals to be models in a fashion show for an AIDS benefit; sponsoring a charity golf tournament to combat drug abuse; and giving cars as gifts to friends, relatives and employees.

“This guy has done a lot of good things, and all anybody wants to talk about are his failures,” says a friend. “I think a lot of people are just jealous of his success.”

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Can Mossimo the company, and Mossimo the brand, be salvaged? Yes and maybe, industry experts say.

Turnaround specialist John Brincko, who joined the company in January and was named chief executive on Thursday, has stopped most of the bleeding. He’s eliminated 42% of the company’s jobs and whacked the pay of the remaining employees by 5% to 20%. The company is looking to cut costs further by leasing its corporate headquarters in Irvine Spectrum and moving to smaller, less-expensive digs.

Near-term, Mossimo must reverse its sales slide and attempt to regain momentum. There are some bright spots. Lunada Bay sold more than $30 million worth of Mossimo women’s swimwear in fiscal ’97, a 15% increase during a time when the category was flat, Crank said.

Mossimo also plans to launch a potentially lucrative unisex fragrance with a Procter & Gamble unit. It will debut in department stores later this year.

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Some competitors have shown a keen interest in Mossimo. In recent months, Giannulli has rejected overtures from New York menswear designer Nautica Enterprises, which wanted to buy the company outright, and a pitch from Gotcha International Chairman Marvin Winkler, who proposed merging his privately held Irvine surf wear maker into Mossimo.

The key to a successful turnaround will be for Mossimo to once again come up with a look that shoppers will crave.

“They just need to sit down and lock themselves in a room and decide who they are and what they want to do and then go attack that market,” said Quiksilver’s McKnight. “There’s still a lot of magic left in the name.”

Potter of Directives West believes that 15-to-18-year-old young men are Giannulli’s ideal market. “His apparel has always really appealed to that kind of pre-collegiate young man. That kid doesn’t know what Mossimo’s stock price is or whether the company is making money, and he doesn’t care. If [Giannulli] designs to what this young man wants, he’s going to be back.”

Giannulli is heading in that direction by attempting to jump-start the beachwear business. The company has introduced a line of shirts, shorts and denim pants, called Moss, aimed at the specialty stores and surf shops.

Among those giving the new line a try is Pacific Sunwear of California, whom Mossimo jilted in 1995 by canceling shipments at the start of the Christmas shopping season.

Nordstrom also is encouraged by Mossimo’s effort to “return to the look our customers are asking for,” spokeswoman Myklebust said.

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But others aren’t willing to give Giannulli a second chance. Huntington Surf & Sport, which sold Mossimo T-shirts, shorts and caps in the 1980s and early ‘90s, has no plans to buy the Moss line.

“We’re just sticking with the people who stood by us,” said Chris Saenz, operations manager of the Pacific Coast Highway store, one of the biggest surf shops in Southern California.

However, ASR’s Overin noted that if the “fashion’s there, and if the price points are right, they’re going to buy it. That’s really what it comes down to.”

And that is what Giannulli is banking on in his bid to make a comeback.

“Moss fully intends to turn this around,” said Lunada Bay’s Crank. “A few years from now, the reports are going to be quite different.”

Mossimo shareholders certainly hope so.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

High Flier Falls to Earth

Mossimo’s stock rocketed on its first day of trading in February 1996 and reached the $50 a few months later. But a series of management missteps by the Irvine-base apparel firm has pushed the share price to less than $5. Mossimo’s monthly stock price closes and latest:

Friday: $4.75

Sources: Bloomberg News, Times reports

Researched by JANICE L. JONES / Los Angeles Times

Plunging Net Line

Mossimo’s sales and earnings sank in 1997, both reaching low points in the fourth quarter:

Sales (quarterly, in millions)

1996: $25.7

1997: $12.9*

*Estimated

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Profit (quarterly, in millions)

1996: $5.8

1997: --$13.5*

*Estimated

Mossimo Signposts

1996

* February: Share price jumps 39% to close at $25 for its New York Stock Exchange debut.

* May: Company reports solid gains in earnings and sales for its first quarter as a public entity.

* June: Share price reaches an all time high of $50.

* October: Shares fall to $23 on warning that third-quarter earnings will not meet analysts’ expectations; unexpectedly high production costs blamed.

* November: Share price drops to $16.50 after analysts downgrade their opinion of the stock in the wake of disappointing third-quarter earnings.

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1997

* January: Company warns that fourth-quarter profit will be less than half analysts’ expectations; company blames inventory shortages caused by late deliveries of holiday merchandise, unexpected production expenses and warehouse problems. Disgruntled shareholder files suit, alleging founder Mossimo Giannulli misled investors as to the value of his company and overstated its ability to handle expansion into women’s apparel market.

* April: Company warns of first-quarter loss of nearly $500,000; share price falls below $6.

* May: Mossimo begins a restructuring that includes pay cuts and the elimination of jobs.

* November: Company warns that a third-quarter loss of $4.8 million is likely; share price falls $1.31 to $6.

* December: Mossimo’s stock is the NYSE’s second-biggest loser on Dec. 16, as the company shares fall 12.7%, or 44 cents, to $3.

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1998

* February: Giannulli puts his ultramodern Laguna Beach home and the site where he planned to build a home overlooking Newport Harbor up for sale.

* March: Company reports fourth-quarter loss of $13.5 million, it appoints John Brincko president/CEO; succeeding founder Giannulli, who continues to serve as chairman and takes the new title of “Visionary.”

Sources: Bloomberg News, Times reports; Researched by JANICE L. JONES/Los Angeles Times


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