With Losses Mounting, Mossimo Turns to Target

TIMES STAFF WRITER

Clothes designer Mossimo Giannulli, who wooed well-heeled patrons with stylish beach and urban wear, announced Tuesday he will begin selling his clothes in discount Target stores next year.

The move, part of the Irvine apparel company's effort to shore up its flagging operations, stunned some industry experts, who saw it as a marked departure from the high-profile owner's earlier strategy.

"He envisioned himself as the next Ralph Lauren--he talked about the 'Moss lifestyle,' " said Steven Martin, who has followed the company since it went public four years ago. "I don't think Mossimo ever envisioned himself making public appearances at Target stores."

His company, Mossimo Inc., announced that Chief Executive Edwin Lewis has resigned and that it will dismiss "a significant number" of employees as part of a restructuring. The company has about 100 workers.

The company also said its losses more than doubled in the fourth quarter and that it is trying to arrange interim financing to continue its operations until the licensing deal with Target begins to generate revenue next year. Without such financing, Mossimo's accountants question whether it will be able to continue as a going concern, the company said.

The bombshell came on the heels of what had seemed to be a turnaround for Mossimo, which had struggled in recent years after attempting to move too quickly to fashion-oriented apparel from its more casual beachwear roots. Last October, the company reported its first quarterly profit in two years.

Giannulli, 36, has been in the front seat of a wild roller coaster ride since he took his company public in 1996 and the stock shot to $50 a share from $18 in just a few months. Within a couple of years, the stock had plunged to the single digits as industry experts chided the designer for making a major misstep by switching gears too quickly.

In a bold move to right the company, Giannulli in late 1998 gave up half his share in the business to hire Lewis, former chief executive of Tommy Hilfiger Inc., for the top job at Mossimo. Industry experts hailed the move and the stock quickly moved upward.

The stock closed Tuesday at $6.50 a share, down 6 cents, on the New York Stock Exchange. The restructuring was announced after the close of regular trading.

Industry experts were divided Tuesday about what the latest about-face means for the company, or for the high-profile designer who gave it his name.

Some said that teaming with Target could be a wise strategy, assuming that Mossimo can get critical interim financing.

"Target is today the most modern, coolest big box retailer in America," said Dick Baker, chief executive of surf wear maker Ocean Pacific Apparel Corp. in Irvine.

Others said the licensing deal probably won't be particularly lucrative and questioned whether Mossimo will be able to obtain the needed financing.

"If this was such a good deal, somebody would have lent the money up front," said Martin, president of Slater Asset Management.

In any case, the move from department stores such as Bloomingdale's and Macy's to a discount chain is a comedown for Giannulli, Martin said.

Mossimo officials could not be reached for comment.

The company, in a prepared statement, said it decided on the new strategy after hiring consultants to consider its options. With the company departing from its traditional method of operation, Lewis opted to resign as president and CEO. He will continue to advise the company, Mossimo said.

Under the deal with Target, Mossimo said, Giannulli will contribute "design services" and license his company's trademark to the retailer, which will sell men's and women's apparel bearing the Mossimo brand in all 923 Target stores nationwide.

Target may expand its Mossimo line to include other products, such as housewares, accessories and fragrances, Mossimo said.

Mossimo said the agreement includes a three-year sales guarantee totaling $1 billion, beginning next February. Mossimo will receive a royalty based on the sales.

"By joining forces with what we believe to be one of the leading retailers in the market today, we can further leverage the strength of the Mossimo brand and significantly expand our reach," Giannulli said in a statement. "I truly believe this represents the next big evolution in retailing--dominant retailers working together with marquee brands toward a common goal."

In an attempt to drum up more business, mass merchandisers have tapped name-brand designers to turn out shirts, towels, tea kettles and the like for them. Wal-Mart, Target and Kmart have lassoed a stable of big-name designers in their ongoing attempt to transform themselves from low-budget to bargain chic.

Kmart sells Martha Stewart bedding, towels, napkin rings and scores of other items at its stores, helping burnish Kmart's once dowdy image.

Target has reinvented itself by hiring upscale designers to do low-cost versions of their products. Michael Graves, known for his work for respected design firms such as Alessi in Italy, offers Target such items as stainless-steel teakettles and wood patio furniture, for example.

At the same time, Mossimo has been struggling to hold its own in the department store arena.

"They got in the door [but] it's brutally competitive in that space," said Jeffrey Van Sinderen, an analyst with B. Riley & Co. "It sounds to me like this probably was a good strategy for them."

For the fourth quarter, Mossimo's losses widened to $7 million, or 46 cents a share, from $2.6 million, or 17 cents a share, a year earlier. Sales dropped 12% to $7.4 million.

Giannulli started his company in a garage in 1987, selling neon-colored volleyball shorts and T-shirts. The company grew to a $72-million annual enterprise in eight years before going public in February 1996.

After his company began having trouble, Giannulli first attempted to right it himself. Later, he enlisted the help of industry heavyweights, including turnaround specialist John Brincko, who slashed costs, got rid of workers and moved Mossimo to a much smaller, less expensive headquarters.

Next, Mossimo hired Lewis, prompting other Hilfiger executives to follow him to Irvine.

Even if the Target deal is successful, the company faces other hurdles.

Some observers, for example, questioned how Mossimo's other licensees will react to the agreement with Target, since they are used to selling Mossimo goods at department stores. Existing license agreements will remain in effect.

"How are they going to sell their products to the department stores if Target's going to be selling the product?" Martin asked.

Susan Crank, chief executive of Lunada Bay Corp. in Anaheim, the licensee for Mossimo swimwear, said she was "stunned" Tuesday when she heard the news.

"I'm still gathering my thoughts as to how Lunada Bay will be proceeding in the future," she said. "This is a lot to absorb in one day."

Times staff writer Marc Ballon contributed to this report.

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