Women’s Wear Daily
04.23.2014
financial
financial

Kellwood to Exit 3 Divisions in Overhaul, Cuts Earnings Outlook

Kellwood Co. said it was closing several units, including intimate apparel, representing $335 million in sales, and lowered guidance for the year.

financial/news
NEW YORK — Kellwood Co., seeking to restore itself as a top branded apparel company, announced a major restructuring Wednesday that could result in the sale of three of its 14 divisions.

In the first major moves since Robert C. Skinner Jr. was promoted to president and chief executive officer two months ago, the company also said it would reduce its second-quarter and fiscal 2005 outlook.

Kellwood said it has put in place a strategy to exit the Kellwood Intimate Apparel Group, Kellwood New England and Kellwood Private Label men's wear divisions — excluding its Smart Shirts subsidiary. In addition, the company is restructuring its Oakland Operation by pulling out of several labels to better focus on developing the Koret brand.

The future of the divisions was unclear. Kellwood said it was working out alternatives for each of the businesses and is considering the sale of some or all the units. It has retained investment banking firm Financo Inc. and its chairman, Gilbert Harrison, in an advisory role.

Skinner said in a statement that the strategy to exit nonstrategic businesses is part of an initiative to reestablish Kellwood as "a premier marketer of branded apparel and related soft goods.

"We expect that these actions will allow us to better focus our resources to further build our existing portfolio of lifestyle brands and effectively pursue additional growth opportunities in the marketplace," Skinner added.

"This strategy, along with actions taken to upgrade our talent base, reduce cycle times and improve our assortments, should result in better operating performance in fiscal 2006," Skinner said.

Several of the $2.6 billion company's labels have seen dwindling sales as department stores merge and cut back on their moderate areas.

Kellwood New England includes the David Brooks, Northern Isles (women's), Pink Poodle and licensed Bill Burns brands. Bill Burns went through a makeover for fall with a stronger focus on contemporary separates rather than coordinated suits and ensembles, and planned to build its distribution to specialty stores nationwide. Industry sources peg Bill Burns' wholesale volume at $10 million to $12 million.

Some of these sportswear lines are small in comparison with the businesses Kellwood intends to keep, such as Sag Harbor, which generates $600 million in wholesale volume (including licensees), and Phat Fashions, which garners $750 million in retail sales through its Phat Farm and Baby Phat labels.
Kellwood also plans to restructure the Oakland Operation, which includes brands such as Beliza and Jax, and to make licensed women's tops for Dockers. Kellwood said it plans to exit some of these labels to focus on Koret.

The company anticipates the costs associated with withdrawing from the businesses to be $225 million before tax, or $155 million on an aftertax basis. Included in the charge is a write-off of intangible assets.

"We have been retained by Kellwood to provide financial advisory services in their sale and exiting of these three groups. We have been reviewing the information on the three divisions and feel that each of them create strategic opportunities for a variety of potential buyers," Financo's Harrison said in an interview.

Kellwood has already begun the restructuring and hopes to complete the plan over the next 12 months. It expects to take a $110 million aftertax restructuring charge in the second quarter and to book the remainder of the charge for the restructuring in the second half of the year.

For the second quarter, the company revised earnings at $600,000, or 2 cents a diluted share, on estimated sales of $560 million to $570 million. The estimates are before both the recognition of tax benefits from repatriation of foreign earnings and the restructuring charge. The previous guidance was for earnings of $10.5 million, or 38 cents. Kellwood will post its second-quarter results on Sept. 1.

For fiscal year 2005, the company reaffirmed its sales guidance in the range of $2.43 billion, which includes sales from divisions and brands that it will exit or restructure. Kellwood forecast earnings in the range of $37 million to $38 million before both the recognition of the tax benefit from the repatriation of foreign earnings and the restructuring charge.

The sale of the intimate apparel business was anticipated by several executives familiar with Kellwood's intimates business, which is part of a $421.5 million unit comprising intimate apparel, Gerber Childrenswear and American Recreation Products. The unit also consists of the LA Intimates operation based in Los Angeles, which produces private label and Dentelle lingerie, as well sleepwear and loungewear bearing the Sag Harbor name. The company also holds the licenses for Oscar de la Renta foundations, which have been distributed at Federated Department Stores, and Izod sleepwear and loungewear.
Industry experts said Kellwood's intimate apparel business, which is anchored in basic commodity-type goods such as moderate-price sleepwear, is a segment of the innerwear business that makers anticipate will be squeezed in the wake of the planned merger of Federated and May Department Stores. That deal is expected to close in the fall.

At Kellwood's annual meeting June 2, Skinner told shareholders that the intimate apparel group's performance had been disappointing during the past year. For the year ended Jan. 29, sales in the intimate apparel group dropped 5.3 percent, or $23.5 million.

"I think we stayed with a business model that had worked very well for us in the past and perhaps stayed too long — that of being essentially a manufacturer of commodity products," Skinner said at the meeting. "Intimate apparel, as we've said publicly, has been a challenged part of our business. The key right now is fixing it."

At the time, neither Skinner nor Hal Upbin, Kellwood's former ceo, who will remain as chairman through January, denied that selling the division was a possibility. "We are getting into new strategic planning, so all avenues are open right now in that process," Upbin said.

One former Kellwood executive, who asked not to be identified, said on Wednesday, "Moderate brands and the moderate market are going through a tough time right time — and so is Kellwood. When the company took a hit of more than 50 percent in the first quarter, they said it was the fault of intimate apparel. That's like GM saying their business is off because the Saturn isn't selling."

Kellwood announced the restructuring shortly after 5 p.m., although speculation about the business circulated throughout the day. Shares of Kellwood, which is traded on the New York Stock Exchange, closed Wednesday at $28.11, up 0.57 percent.

Kellwood recently came off a disappointing first quarter. Earnings for the quarter ended April 30 declined 50 percent to $12.5 million, or 45 cents a diluted share, from $25 million, or 90 cents, versus a year ago. The drop for the quarter was attributed in part to lackluster sales of women's sportswear.

Sales for the quarter fell 6.8 percent to $639.4 million from $686.1 million in the prior year. Sales of women's sportswear declined 17.8 percent to $360 million from $438 million, with the decline primarily in the firm's popular-to-moderate and private label businesses. The dress category contributed $26 million to the decline (Kellwood includes dresses in its sportswear division). One upbeat note was sales of men's sportswear, which increased 28.3 percent to $164.5 million from $128.2 million.
In another development Wednesday, Kellwood announced a stock-repurchase program authorizing the company to repurchase, at the company's discretion, as much as 10 percent of the outstanding shares of its common stock through open market or privately negotiated transactions.

— With contributions from Karyn Monget
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