Kellwood Co. upgraded to "buy" by Lazard
Women’s and men’s sportswear marketer Kellwood Co. (NYSE: KWD) was upgraded today by Lazard Capital to a rating of “buy” from “hold,” based on an unsolicited bid by Sun Capital for Kellwood as well as on a number of strategic initiatives the retailer has undertaken.
“Our argument isn’t that it can’t go lower (it can). Rather, we think it is likely that margins will recover even if the moderate segment remains challenged” Lazard analyst Todd Slater wrote in a research note today.
The company has undertaken a number of initiatives that Slater thinks will boost margins.
Among the small-cap retailer’s initiatives, Kellwood will begin licensing its men’s Phat Farm business in spring of 2008—a move that according to Slater, should cut costs, boost margins and lower risk for the company. Slater says by refocusing Phat Fashions as a pure licensing model, “Kellwood is quietly evolving this business into a shareholder’s dream: capital light, margin right.”
Kellwood also recently ended an unprofitable pants joint venture to address manufacturing inefficiencies in its Smart Shirts operation in the second quarter of 2007.
Further, the retailer is consolidating seven of its women’s operating divisions into three. According to Slater, the move should lower its cost structure by $30 million to $35 million annually.
The company also recently acquired some “high-margin growth” brands, including Hanna Anderson, Vince and Royal Robbins, which Slater says should contribute to margins as well.
The possibility for upside doesn’t end in the company’s undertaking of strategic initiatives. Sun Capital Securities Group, LLC, which made a bid on Sept. 19 to acquire Kellwood at a price of $21 in cash per share, adds greater upside as well. Sun Capital owns 9.9% of Kellwood’s stock. Kellwood is still considering the offer.
On account of Sun Capital’s bid and the company’s initiatives, Slater is raising his estimates and establishing a 12-month price target of $24 per share. The analyst is raising his 2008 EPS estimate to $1.70 per share from $1.55 and is forecasting earnings of $2 per share for fiscal 2009. The consensus of five analysts polled by Thomson Financial is for earnings of $1.35 per share and $1.63 per share for 2008 and 2009, respectively.
Shares of Kellwood (KWD) rose $0.79, or 4.63%, to $17.84 in afternoon trading Monday. Over the last 52 weeks, shares have ranged between $14.21 and $34.84.
