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Kellwood Plays Catch-up With Destination Brands

Kellwood Co.'s DNA is in private label, which is why it's ironic that the surge of retailers' own brands has given the St. Louis firm such a hard time.

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Robert C. Skinner Jr.

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A Sag Harbor fall ad.

Photo By WWD Staff

Kellwood Co.'s DNA is in private label, which is why it's ironic that the surge of retailers' own brands has given the St. Louis firm such a hard time.

In 1961, 15 suppliers to Sears, Roebuck & Co. merged to form what is today a $2 billion manufacturer. In the early Eighties, Kellwood started making acquisitions, buying Smart Shirts Ltd., which for most of the last two decades has produced competitively priced private label tops, and then buying moderate brand after moderate brand, including Sag Harbor. In the process, Kellwood established the strategy it uses to this day — manufacturing other company's lines via licensing arrangements.

But as the retail climate changed, analysts argue, Kellwood did not, although some observers are seeing hopeful signs under new ceo Robert C. Skinner Jr. As department stores consolidated, Kellwood played its cards poorly, losing key accounts for Sag Harbor. As stores built private label, Kellwood lost its competitive advantage to firms like Asian sourcing giant Li & Fung. And as department stores dropped moderate brands and midtier chains developed exclusives, low-profile moderate brands continued to dominate Kellwood's portfolio.

"In essence, I think the company is having problems transitioning from a ‘moderate' enterprise to a culture that understands how to cultivate more value-added ‘branded' suppliers," said Todd Slater, managing director and senior retail analyst at Lazard Capital Markets LLC. "If it focuses more keenly on product, hires talented designers and gives them the freedom to create, they can produce more compelling product and become better brand managers and the future could be bright….Their issues are largely self-inflicted."

It's been a rough few years for Kellwood. Although sales increased in 2004, earnings dipped slightly. In 2005, sales fell more than 6 percent, mostly due to a 10 percent revenue erosion in women's sportswear, and the company endured a net loss of $38.4 million. Kellwood swung into profitability in the second quarter of this year, and for the first half of 2006 earnings increased to $16.4 million, or 63 cents a share, from a loss of $67.1 million, or $2.40, in the year-ago period.

The company's core brand, Sag Harbor, epitomizes many of Kellwood's problems, say analysts. Today, Sag Harbor makes up about 12 percent of the group's sales, and it is getting a makeover — trying for a younger and more aspirational image — with Christie Brinkley as its new face.

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A recent Prudential report questioned whether those efforts would be successful. "The company has been promising a fall turn for Sag Harbor for over a year, and now the pace of decline in the business is accelerating," the report said. "We think the brand is losing relevance and will continue to lose space as retailers focus on updated brands and private label."

Brad Stephens, an analyst with Morgan Keegan & Co., noted, "National brands in the moderate segment are over. One of the last ones is Sag Harbor, which is why I am not sold on the fact that it will be viable in the long run."

But times may be changing at Kellwood. In 2005, when Skinner took over, management reviewed the portfolio and began a $225 million restructuring to streamline its moderate business and increase the percentage of higher-end destination brands in its portfolio.

A lot has happened since. Last year, Kellwood sold its moderate areas, including David Brooks, Dotti and Biflex Intimates Group, and last week Kellwood and Philips-Van Heusen mutually agreed that Kellwood would return to PVH the women's sportswear license for Izod, a moderate brand.

"I think Bob Skinner is taking the right approach by trying to divest themselves of the weaker brands," said Elizabeth Montgomery, analyst for Cowen & Co. "Bob Skinner came from Oxford, which was for a long time doing licensing for Tommy Hilfiger and Ralph Lauren, and then lost key licenses and used that experience to learn they needed to buy things like Tommy Bahama. I think Bob Skinner will take that experience and will do the same thing here."

While Kellwood tries to temper its moderate presence, it is building higher-profile lines through acquisitions and licensing deals. In 2004, it bought Phat Farm for $140 million, and while that label has struggled in the last two years, the women's brand, Baby Phat, has thrived. Last month, Kellwood bought fast-growing contemporary line Vince. On the licensing front, it relaunched the Calvin Klein better women's sportswear line for fall, is relaunching O Oscar as a better line for spring in an exclusive deal with Macy's and just won the license for the ck Calvin Klein bridge sportswear line, which it will redesign for spring 2008.

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"Relaunching O Oscar and Calvin Klein is an opportunity for them to prove they are a viable licensee, but relaunches of labels very rarely work. Once labels fail once, it's hard to resuscitate them a second time," Stephens said. "You have to be concerned by a portfolio like that, because you have to worry that when their contract is up, they may lose it. But they have been very forthright that they know their strategy has to evolve."

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