Kellwood: A share price in tatters
Shares of apparel maker Kellwood Co. (NYSE: KWD) have been in tatters in recent months. More than anything, the St. Louis company behind such diverse labels as Sag Harbor, Gerber, Liz Claiborne and Phat Farm has suffered more from industry conditions than from execution of its business strategies.
Outside of the retail sector, few consumers would recognize Kellwood as the apparel powerhouse behind a laundry list of brands that it either owns or controls through licensing agreements. It has grown over its 46-year existence to become a company with $2 billion in annual sales, yet it remains a small-cap stock to own, with a market capitalization of about $505 million after Wednesday’s dip to a new 52-week low.
Retailing is in the throes of big changes, and Kellwood is tangled up in them. Wal-Mart Stores Inc. (NYSE: WMT) has been trying to shore up its bottom line. Macy’s Inc. (NYSE: M) has struggled to absorb another St. Louis company, the former May Department Stores, which has resulted in store reductions – and fewer places to sell the Kellwood brands. During the fiscal year ended February 3, Wal-Mart accounted for 12% and Kohl's Corp. (NYSE: KSS) accounted for 11% of Kellwood’s net sales.
The retail turmoil has triggered a restructuring at Kellwood, including a facilities retrenchment and an executive shuffle. Controller and VP of finance Gregory Kleffner has taken over as chief financial officer, a title relinquished by W. Lee Capps III so that he can focus more on operations as chief operating officer.
On June 8, when Kellwood released mediocre results for its fiscal first quarter ended May 5, it also issued second-quarter guidance a little softer than Wall Street was expecting. For the quarter that ended Aug. 4, the company said it was expecting earnings from continuing operations in the range of $0.37 to $0.39, on revenue of $460 million to $470 million. The consensus estimate from analysts surveyed by Thomson Financial at the time was for $0.40 per share on revenue of $469.1 million.
The company did stick with its full-year guidance of $1.80 to $1.89 per share with a revenue outlook of $2 billion to $2.03 billion. The company will report results from the just-completed quarter next Thursday. Analysts polled by Thomson Financial currently are looking for earnings of $0.34 per share, down from $0.37 last year, and $467 million in revenue, up from $460 million in the 2006 quarter.
Because of these issues, of the half-dozen analysts who cover Kellwood, four have the equivalent of a hold rating on its shares. The other two are split: one says buy, the other recommends selling the stock.
Despite its bloated brand roster, Kellwood has been on a buying binge, as it culls out the weaker labels and adds some up-and-comers. Last October, the company acquired CRL Group, a maker of women's apparel including the Vince sportswear line, then in December bought Hollywould, a manufacturer of women's apparel, shoes and accessories. The company completed two deals in July, spending $40 million for Royal Robbins, purveyor of outdoor footwear and apparel, and $175 million for Hanna Andersson, a children’s clothing maker.
One growing concern is that financially struggling consumers are foregoing big-name apparel brands in favor of private-label brands, especially for moderately priced women’s wear. The latest acquisitions help it move deeper into the higher-priced apparel arena, while it continues to grow as a major player in supplying private-label goods.
Kellwood said that in the quarter ended May 5, net sales declined to $484.4 million from $493.8 million the year before. Net earnings fell to $7.4 million, or $0.28 per share, from $9.2 million, or $0.36 a share in the 2006 period. Weaknesses were spotted in some private brands, its women’s pants and skirts business, and the specter of rising costs.
During a June 8 conference call with analysts to discuss the fiscal first quarter’s results, Robert Skinner, the company’s chairman, president and CEO, addressed the concern about its product mix.
“Kellwood has always prided itself in the diversification of its sales by channel, by customer and by price point,” Skinner said, noting that 34% of net sales in the quarter were from better- and above-priced brands, a 5-percentage-point improvement from the year before. “This allows us to maximize growth while limiting exposure to any one brand or channel. Today we have strategies in place to improve challenging areas of our company.”
That strategy might have helped blunt the double dose of unpleasant news that investors received on August 23. After the stock sank that day to what at the time was a 52-week low of $20.50, Kellwood issued a press release after the bell to announce that hip-hop pioneer and Phat Fashions founder Russell Simmons was stepping down as CEO of the company that he founded in 1992. Simmons had sold Phat Fashions and its popular Phat Farm label to Kellwood in 2004 for a reported $140 million.
Kellwood also announced a partnership of Long Street Industries to design and market clothing collections under the Phat Farm and XV brands. Long Street has been producing Baby Phat and Phat Farm swimwear and Phat Farm big-and-tall sportswear under a licensing agreement.
The next day, Kellwood said that Simmons’ ex-wife and longtime business partner and former model, Kimora Lee Simmons, would become creative director for Phat Fashions while retaining her responsibilities as Baby Phat president and creative director. Shares rebounded by more than 1% off the lows.
It appears that Kellwood and its subsidiaries are working to keep the Simmons creativity growing. The Simmons’ daughters, Ming Lee, 7, and Aoki Lee, 4, recently worked with the Baby Phat designers to produce a children’s clothing collection under the Baby Phat Girlz brand.
Russell Simmons has indicated the growing potential of the hip-hop culture, saying it is “the best and most important brand-building force in America.” He’s also said that research has shown 80% of hip-hop music is being bought by non-African-Americans.
Kellwood began in 1961, when 15 independent suppliers of soft goods to Sears, Roebuck and Co. merged together, to form an operation with 22 plants in 10 states and 7,000 employees. The name came from two former Sears’ executives, Charles H. Kellstadt and Robert E. Wood.
Today with nearly $2 billion in annual shares, it has 30,000 employees and operations around the world. Its shares have traded on the NYSE since 1973.
Some observers have tossed out the possibility that Kellwood could come into play for a takeover, with its sagging stock price and a market cap below $600 million. In addition to its strong brand lineup, Kellwood also is sitting on more than $300 million in cash. In June, SCSF Equities of private equity firm Sun Capital disclosed in a regulatory filing that it had taken an 8% stake in Kellwood during the second quarter, without indicating whether it intends to increase its position.
Analysts have not made many alterations to their views of Kellwood’s stock potential in the past six months or so. Analyst Brad Stephens at Morgan Keegan did boost his outlook to market perform from underperform on Aug. 13, rationalizing that the recent acquisitions present Kellwood with the opportunity to meet its guidance. Back in January, Randall Scherago of First Albany initiated coverage of Kellwood with a buy rating and a $38 target, saying that he expected restructuring efforts to take hold in the first half of 2007.
While Kellwood continues to tinker with its brands, and cuts overhead wherever possible, the company is likely to feel continued pressure to perform. Whether it can deliver fashionably pleasing results will depend on the several things, including the strength of the economy, the health of the retail climate, and whether consumers are willing to spend on the latest in apparel.
