Perry Ellis: designing a new pattern for profits

Perry Ellis, the American clothing designer who electrified the fashion world in the 1970s and ’80s, started the first version of Perry Ellis International at the end of the 1970s in New York City.

Ellis created popular lines of colorful, casual men’s clothing, but the company he founded struggled after he died in 1986.

In 1999, Miami-based Supreme International Corp., an apparel company founded in 1967 by Cuban immigrant George Feldenkreis, took over the Perry Ellis brand.

“We started out small,” said Feldenkreis, chairman and CEO of Perry Ellis International, during an interview at the company’s headquarters. Among the first apparel products Feldenkreis imported in the 1960s were guayaberas, the four-pocket shirts that were popular among Cuban immigrants arriving in South Florida in the 1960s and ’70s, giving his company an early presence in the rapidly growing Latin community.

Today, Doral-based Perry Ellis International (PEI) is a major force in South Florida’s economy and an important player in the casual apparel and sportswear sector.

The publicly traded company (stock symbol: PERY) designs, sources, sells and licenses a wide variety of men’s and women’s sportswear, golf lifestyle clothing and accessories. It competes against brands and companies like Ralph Lauren and PVH (Calvin Klein, Tommy Hilfiger, IZOD).

With annual revenues of more than $900 million from U.S. and overseas sales and about 5,150 employees, PEI today is much larger than Ellis’ original New York fashion house.

PEI’s spacious headquarters in Doral provides about 500 jobs for designers, color, cloth and fashion experts, fashion photographers, quality control and product testing professionals, buyers, international logistics experts, sales and marketing staff as well as office and warehouse personnel. Including the Doral headquarters, PEI has more than 1,000 employees in Florida, some at retail stores and others at its office and warehouse in Tampa.

The company sells a stable of well-known brands — including Perry Ellis (its premier brand), Original Penguin, Jantzen, Savane, Cubavera and Rafaella — at more than 20,000 stores in large retail chains, as well at its own retail outlets in the U.S. and overseas.

Yet PEI currently is facing some serious challenges. Even though the Great Recession officially ended in mid-2009, PEI’s revenues have flagged over the last three fiscal years, and it logged a net loss of $22.8 million for fiscal year 2014, which ended Feb. 1, 2014. This comes after years of steady profits, except for fiscal year 2009.

For the third quarter of fiscal year 2015, which ended Nov. 1, 2014, PEI had a net loss of $437,000 on revenues of $211.4 million. However, for the first nine months of the same fiscal year, PEI earned profits of $5.7 million on revenues of $627.3 million.

Among its many brands, some are minor players, contributing little to PEI’s growth as rising costs impacted earnings.

And complicating the company’s situation, an activist investor — California-based Legion Partners LLC — last year publicly stated that PEI’s operating performance and long-term stock performance “have both been extremely poor,” blaming this on “significant long-term execution and leadership deficiencies.” Legion holds about 6 percent of PEI stock.

Together with another investor, the California State Teachers’ Retirement System (CalSTRS), Legion called on PEI to set up a “special committee” of the board of directors and hire an independent investment bank “to evaluate strategic alternatives,” including a potential takeover of PEI by another company. At least one company — and perhaps more — reportedly has had some interest in acquiring PEI.

“They are underperforming every company in their peer group, and management has no credible plan to improve performance for shareholders,” Legion Partners managing director Chris Kiper said. “If you don’t sell the company, you need to select a new leadership team.”

Although Legion Partners has not given any indication that it would start a proxy fight with PEI’s senior management, this is an alternative that activist shareholders sometimes choose to force a change.

In response, George Feldenkreis pointed out that PEI has already taken important steps to deliver sustainable growth in revenue and profits under a strategic operating review that started two years ago.

“We’ve seen steady progress as we have focused our portfolio [of brands], cut costs and expanded our profitable licensing and international operations,” he said.

“So far this [fiscal] year, we’ve signed new licensing agreements, cut costs by $8.2 million and exited low-margin brands,” said Oscar Feldenkreis, PEI’s vice chairman, president and COO and George’s son.

The company also is adding new websites to advance growing e-commerce sales, placing more emphasis on selling its strongest brands and has named a new independent director to its board.

“Part of our strategy has been to diversify our channels of distribution, so that if one channel is weak, another will be strong,” said Oscar Feldenkreis, who began working in retail apparel while he was in high school and whose experience includes marketing, branding, sales and manufacturing.

“We sell to stores from Walmart to Neiman Marcus.”

Also, he noted, some of the recent revenue losses have been caused by eliminating nonperforming brands. Moreover, in the third quarter of fiscal year 2015, port delays on the West Coast meant merchandise worth $6 million did not reach buyers as scheduled, but the company says that revenue from that will appear in the fourth quarter’s results.

The Feldenkreis family holds close to 30 percent of the company’s shares, and management is working for the good of all investors, Oscar Feldenkreis stressed.

“We will listen to any shareholder who has ideas for making us more efficient,” he said. “We will make decisions for the good of the company and in the interests of all shareholders.”

As a sign of the company’s strength, he pointed out that the stock price of PEI (traded on NASDAQ under the symbol PERY) rose 64.5 percent last year, compared with a 14 percent increase for the S&P 500 and a 13.4 percent for the NASDAQ.

According to Thomson/First Call, equities analysts covering PERY had zero recommendations for “Strong buy,” one for “Buy,” three for “Hold,” one for “Underperform” and zero for “Sell” during the current month.

In a recent report on PEI, Deutsche Bank Markets Research placed a “Hold” rating on the company’s stock. The analysts gave PEI “credit for the initial phases of what may be a turnaround,” but questioned whether the company’s recent initiatives will “drive long-term growth patterns” and asked if “the existing stable of brands” would be “appropriate for the future.”

In contrast, a report by Wunderlich Securities (“Buy” rating) said, “We believe the company remains on track to once again register [year-over-year] top-line growth” and that management initiatives “will continue to pay off in FY15 and beyond.”

An expert in international business, Joseph Ganitsky, pointed out that the fashion business is extremely dynamic. “What can give you success in one season may not work the next season,” said Ganitsky, director of the University of Miami’s Center for International Business Education and Research. “Competitors have to constantly re-invent themselves, and even then there is no guarantee of success.”

He also noted that people who believe that bringing in new leadership and new strategies are not always right, as in the cases of Yahoo and JC Penney. What can really help PEI — as well as any other clothing designer — “is a hot product they can use to propel sales of their other product lines,” he added.

To launch new product lines and keep up with fashion trends each season, PEI must develop new designs, go to test markets, consult with customers and make final decisions six to nine months before apparel is scheduled to reach stores, explained Ocar Feldenkreis.

To make this all work, the company has long-standing relationships with reliable clothing producers in China, Vietnam and other countries who convert PEI designs into new lines of high quality apparel that cross the seas on time for each buying season.

“If you have good design, good prices and a tailored fit, you have the ingredients to be successful,” he added.

Two of PEI’s key customers praised PEI, its products and its management.

“We’ve been working with them for over 30 years [PEI and Supreme International],” said John Tighe, senior vice president and general merchandise manager at JC Penney. “We have about 1,000 stores and we carry some of their lines in all our stores and limited collections in others. We buy different lines — Nike Swim, golf apparel, Havanera, private labels and accessories — and their products sell very well. They are great partners, and we are happy to do business with them.”

Terry Lundgren, chairman and CEO of Macy’s, said his company did some business with Supreme International but increased purchases significantly once they took over Perry Ellis International.

Macy’s carries Perry Ellis men’s sportswear, pants, belts, wallets and socks, as well as PGA Golf, Callaway Golf, Jack Nicklaus Golf, Cubavera and Nike swimwear, he said. One or more of these brands are sold at about 400 Macy’s locations and on macys.com.

“These brands are very popular,” Lundgren said. “Perry Ellis and Nike are known everywhere. Cubavera is best known in Florida, but the name recognition is growing in other warm climate markets. The golf brands are recognizable to anyone who plays the sport.

“The name Perry Ellis is legendary in the fashion industry and we look for brand recognition. When you combine a great name with management we know and trust, it generally works out well for us. Ultimately, the customer decides whether or not they like or want the product, and the customer has voted ‘Yes’ in this case.”

This story was originally published February 1, 2015 at 2:00 PM with the headline "Perry Ellis: designing a new pattern for profits."