Sep 20, 2007

Another Apparel Brand Faces Key Strategic Choice

Kellwood Company, maker of midtier department-store clothing brands such as Sag Harbor, is considering an unsolicited buyout offer from Sun Capital Securities Group LLC. The strategic question now is will Sun Capital drive to re-invigorate the company's innovation engine and push for stronger lifestyle branding? Or, as Li & Fung and others are doing, make a big bet on continued commoditized retailing and low-cost overseas sourcing and logistics-based suppliers.

WSJ's Cheryl Lu-Lien Tan reports that in recent years, Kellwood's portfolio of midprice brands has suffered as department stores have consolidated and shifted toward lifestyle and designer brands. Last year, Macy's dropped Sag Harbor, one of Kellwood's major brands. Kellwood has since been trying to beef up its stable of unique brands.

Morgan Keegan & Company analyst Brad A. Stephens said, "Sun Capital can unlock a lot of value in the company if it invests in more efficient manufacturing, distribution and marketing of existing Kellwood brands..."

Sun Capital could go in two very different directions if their offer is accepted. Will they follow the path of their premium, innovation-oriented portfolio companies (Creekstone Farms, Dale & Thomas Popcorn, Lexington Home Brands, Lillian Vernon catalog, The Limited) or do they leverage the Sag Harbor brand and other Kellwood assets for quick penentration of declining commoditized retailers still clinging to private label strategies?

Sun's investments in Mervyns', Pamida, Nationwide Warehouse, ShopKo, and Wickes Furniture suggest they might follow the more questionable Li & Fung path. While we think that path would be risky and have short-term benefits at best, it may carry Sun long enough to exit profitably.

It's interesting that Brenon Daly of The worried as far back as 2005 that Sun Capital's ShopKo deal "...added another retail chain to its portfolio of struggling stores...they already own out-of-fashion clothing chains Mervyns LLC, Anchor Blue...". It will be interesting to see what direction they take in the new emerging era of lifestyle brands and retail innovation.

Here's some encouraging news in the ShopKo saga from Chairman and CEO Mike MacDonald (quoted in Progressive Grocer):
"You always have to stay fresh -- the customer demands that...what we tried to accomplish with this new store is a softer look and a more inviting atmosphere. The new design incorporates a number of elements intended to give the store a stronger connection to women. The store's color, lighting, and fixturing all have been redesigned to create a warm, inviting, residential environment that allows the customer to easily see the merchandise and visualize how it might look in her home or on her body...."

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