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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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Robert C Skinner Jr

Robert C. Skinner Jr.

Photo By WWD Staff

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."

As for the likelihood of the brands being sold, Lewis added, "My concern would be, and their great challenge will be, for the very same reason they're shedding these businesses there will be correspondingly very few suitors interested in buying them."

Within the divisions that Kellwood will shed, it's the Kellwood-owned brands that are for sale. Several licensing agreements will be discontinued, while others such as Izod sleepwear would be included in a potential sale of LA Intimates.

The divisions that will be discontinued include Kellwood private label men's wear, which primarily produces denim-based sportswear for retailers, and does not include the Smart Shirts division, makers of the Claiborne and Nautica men's shirts collections. The company will also shed Kellwood Intimate Apparel, which includes Biflex, LA Intimates and Dotti, and Kellwood New England, which has the David Brooks, Pink Poodle and Pink Inc. brands. It also includes the Bill Burns and Northern Isles women's licenses, which will be discontinued.

In addition, Kellwood will restructure its Oakland operation by eliminating, and perhaps selling the Jax and Beliza labels to sharpen its focus on the Koret brand. Kellwood will continue to ship its licensed Dockers tops through December 2005, but will not be shipping after the holiday and resort seasons.

"The divisions that are being dismissed are because they don't perform or because they are in highly competitive niches," said Harry Bernard, executive vice president and chief marketing officer at Colton Bernard, a San Francisco-based strategic marketing firm. "This decision will help Kellwood's overall business to get rid of those that do not perform. So maybe there are people out there willing to buy these businesses, but I can't imagine why they would. Is there a store out there that sells brands that do not perform?"

Andrew Jassin, managing director of the consulting firm Jassin-O'Rourke Group, said he believes there are buyers out there for some of these labels.

"For the intimates brands, Komar comes to mind right away," Jassin said. "And there are any number of companies out there willing to acquire brands — there's Jones and Claiborne, of course, but also Li & Fung or Land & Sea may look at them. But the overall question here is how much damage has been done to these brands? When we know that, we'll know if they will be purchased or not."

Gilbert Harrison, chairman of Financo Inc., which has been retained as an adviser to Kellwood to sell the brands, said he has already seen some action. "We've had calls from over 15 strategic buyers today," he said, adding they are interested in Biflex intimate apparel, as well as the women's brands such as Pink Poodle and David Brooks. "The objective is to move as rapidly as possible to achieve Kellwood's objectives," said Harrison.

Both Jones Apparel Group and Liz Claiborne Inc. declined comment on whether they are interested in purchasing any of these Kellwood brands.

— With contributions from Vicki M. Young

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