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Kellwood Shares Sink After Firm Lowers Earnings Forecast

Wall Street punished Kellwood's move to shed three divisions and cut its earnings forecast, sending shares down $4.24 to $23.87 on the NYSE.

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NEW YORK — After announcing it would shed three underperforming divisions and reduce its earnings forecast, Kellwood Co. stock fell on Thursday as some industry analysts and executives questioned whether the apparel firm would find buyers for the brands.

Kellwood shares dropped 15.08 percent, or $4.24, to close at $23.87 in New York Stock Exchange trading.

The $2.6 billion company's decision announced Wednesday could also put 1,800 Kellwood employees in the U.S. and overseas out of work.

Lazard Capital Markets analyst Todd Slater downgraded the stock to "sell" on its "sagging outlook" from its previous "hold" rating. He noted that Kellwood also cut its earnings guidance by 40 percent on shortfalls at core/new brands, such as Sag Harbor, Calvin Klein and O Oscar.

As for the restructuring and shedding of three of 14 divisions and smaller brands, Slater wrote in a research note, "Kellwood is taking impressive and necessary steps in streamlining its operations, but the fruits of these efforts could take years to unfold."

The analyst said there could also be further risk to revenue in 2006, as department store consolidation progresses into a more advanced stage. He cited Federated Department Stores' acquisition of May Department Stores and the closure or sale of 68 doors, as well as the sale of Saks Inc.'s northern department store group — Carson Pirie Scott, Boston Stores and Herberger's — as another event that could "result in further unit closings and supplier dislocation."

Frederick Schmitt, vice president of the Sage Group, an investment banking firm in Los Angeles, said Kellwood's decision to shut businesses would lead to greater profitability.

"It's the right move for Kellwood. It's necessary for them to improve their profit margins and this is a good place to start." As for the brands being disposed, he said, "They're money-losing brands. Kellwood needs to migrate toward brands with higher gross margins. It's my estimate that these brands generate the lowest gross margins within the Kellwood company."

Some industry consultants said Kellwood needs to focus on the type of company it wants to be.

"It was a very smart, if not essential, strategic move," said Robin Lewis of Robin Lewis Inc., strategic consultant and publisher of the Robin Report. "In [president and chief executive officer] Bob Skinner's own words, it will allow them to better focus on building a top branded apparel company — and I might add this will also allow them to better focus on and leverage their considerable supply chain skills more efficiently and effectively."

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