Big surfwear companies could merge to fight recession

Industry News

Big surfwear companies could merge to fight recession

Surfersvillage Global Surf News, 11 February, 2009 : - - Nike Inc. and VF Corp. may try to buy sportswear maker Quiksilver Inc., said Bob Copeland, an apparel specialist in Atlanta with consulting firm Kurt Salmon Associates Inc. Clothing maker Phillips-Van Heusen Corp. may combine with Warnaco Inc., said Brian Tunick, a JPMorgan Chase & Co. analyst in New York.

Plunging retail sales have fueled speculation that suppliers of clothes, shoes and accessories will merge as business shrinks. The extent of the industry’s distress became more evident yesterday after VF, the largest U.S. apparel company and the owner of the Nautica brand, forecast a revenue drop this year. VF said yesterday it’s on the lookout for purchases.

“Under the current economic environment, I anticipate a strong push toward consolidation,” said Oscar Feldenkreis, president of Miami-based Perry Ellis International Inc., which designs and makes men’s clothing. Perry Ellis is analyzing opportunities and waiting for financial markets to be “more stable” before “pulling the trigger” on purchases, said Francisco Gonzalez-Meza Hoffmann, the company’s head of mergers and acquisitions.

The Standard & Poor’s Supercomposite Apparel and Accessories Index has dropped 18 percent this year. The group of 19 companies lost 40 percent of its value in 2008.

Survival Concern

In January, department-store chains that buy goods from apparel makers experienced deepening declines in monthly sales as they tried to lure post-holiday shoppers with discounts of 50 percent or more. Industrywide sales at U.S. stores open at least a year fell 1.8 percent last month, according to researcher Retail Metrics Inc.

“The market out there is one in which people are concerned about survival,” said Gilbert Harrison, chairman of New York- based Financo Inc., an adviser to retailers. Jones Apparel Group Inc. said today its fourth-quarter loss widened to $822.9 million after it wrote down footwear and accessories assets and was hurt by holiday discounts.

In early March, Liz Claiborne Inc. may post a $7.2 million shortfall, according to analysts’ estimates compiled by Bloomberg. Phillips-Van Heusen, Warnaco and Perry Ellis will all report drops in profit, according to the estimates. Greensboro, North Carolina-based VF, whose brands include John Varvatos and 7 For All Mankind, confirmed yesterday it was on the prowl for purchases.

“Still Interested”

“We are still interested in acquisitions,” Chief Executive Officer Eric Wiseman said on a conference call with analysts and investors. “And we are fortunate to be in a position where we have a strong balance sheet and good business model that lets us keep active in that space.” Wiseman said outdoor, action sports, contemporary and sportswear segments were “attractive.”

Mergers and acquisitions may accelerate after the retail industry started its new fiscal year this month, said Marc Cooper, managing director at retail adviser Peter J. Solomon Co. in New York. Stronger companies may take advantage of others’ dropping share prices, and smaller apparel makers may seek rescue via buyouts or sell brands, Cooper said. Department stores would welcome combinations, he said.

“They want their vendors to be healthy,” he said. “They want their vendors to be able to source better and cheaper. They want their vendors to be strong financially so they can continue to support them in terms of markdowns.”

Healthy Vendors

Macy’s Inc. CEO Terry Lundgren declined to discuss the subject, “given that any comments he makes can impact the share price of vendors that are publicly traded,” spokesman Jim Sluzewski said. Representatives for Nike, Warnaco and Phillips-Van Heusen declined to comment. Bruce Thomas, a spokesman for Quiksilver, didn’t respond to requests for comment.

Apparel vendors are struggling in part because of department-store chains’ own consolidation, which has reduced the number of locations that sell vendors’ goods and has given the chains more buying leverage. Macy’s, the second-biggest U.S. department-store chain after Sears Holdings Corp., bought rival May Department Stores Co. for $11 billion in 2005.

Banks are reviving their interest in financing such deals, said Neil Cole, CEO of Iconix Brand Group Inc., which owns the Candie’s and Joe Boxer brands. Cole said his company is “starting to see some very interesting” acquisition possibilities, without elaborating.

Most Likely

VF, Iconix, and Phillips-Van Heusen are among vendors most likely to consider buying brands, Robert Drbul, an analyst with Barclays Capital in New York, wrote in a Dec. 23 report.

Phillips-Van Heusen, which owns the Calvin Klein brand, and Warnaco, which produces jeans, swimwear and underwear under the label, could merge to save costs, JPMorgan’s Tunick said at a National Retail Federation convention event in January.

Quiksilver’s shares jumped as much as 72 percent on Jan. 26 after Women’s Wear Daily reported it may be acquired.

The company, now trading at $1.59 a share, may fetch $1.50 a share to $3, Eric Tracy, an analyst with BB&T Capital Markets in Vienna, Virginia, wrote in a Jan. 27 report. If Quiksilver sells only its DC Shoes unit, for an estimated $530 million, it could reduce its $1.1 billion in debt, Tracy said.

Additional takeover targets may include Kenneth Cole Productions Inc. and Tory Burch LLC, according to Fred Schmitt, managing director of Sage Group in Los Angeles. He said his investment banking firm is being “actively approached” by potential sellers.

Representatives for Kenneth Cole and Tory Burch declined to comment. Copeland at Kurt Salmon Associates said companies that can’t stay independent will begin shopping themselves around. “Essentially, what we are talking about is saving some of the value for their shareholders,” he said.

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