Hit hard by the decline in consumer spending and the bankruptcy of Mervyn's, downtown L.A. apparel maker Tarrant Apparel Group has been taken private by its two founders.
Gerard Guez, Tarrant's chief executive, and Todd Kay, vice chairman of the board, purchased the company's outstanding stock at 85 cents per share for a total price of $15.2 million under an agreement approved Aug. 20 by shareholders.
Tarrant has struggled to turn a profit in recent years even though its private-label women's sportswear is sold at Macy's, J.C. Penny and other major retailers. Sales slowed last year as the economy began its sharp decline and Mervyn's, a major buyer, went bankrupt and liquidated.
Tarrant was hit last year with a threat of delisting from Nasdaq when its stock price fell below $1, and all this year shares have failed to rally. To remain a public company, it would have had to trade over the counter, which Guez said would not have been worth the money.
"It cost us roughly $3 million a year to be public. It just didn't make sense to be public anymore," said Guez, who founded the company with Kay in 1985 and took it public a decade later. "We couldn't raise money, there were no banks lending anything and it had become a big burden."
By going private, he added, "we'll be able to invest in the future and not have to deal with quarterly reports. We will have a three- to five-year view of our business as opposed to a three-month view."
Prior to the merger, Guez and Kay each owned 10 percent of the company. Other shareholders included Serge Kraif, a French investor living in Switzerland; former Tarrant executive Charles Ghailian; and GMM Capital LLC. Under the agreement approved by investors holding more than 74% of outstanding shares Tarrant Apparel Group will merge with Sunrise Acquisition Co. LLC and its wholly owned subsidiary, Sunrise Merger Co., both owned by Guez and Kay.
Jack W. Plunkett, chief executive of Plunkett Research Ltd., a Houston-based market research company, said that the low share price allowed the two founders to make an easy decision.
"Wall Street knows that apparel retailers are in trouble. Clothing isn't selling or, if it is, at bargain prices. That means that the suppliers aren't doing well," he said. "So if you believe strongly in the long-term prospects of the company and are able to do so, you have a good chance of buying it back at a reduced price. Then you can quit worrying about making great quarterly profits and take a longer-term view."
In its most recent financial filing, Tarrant, on South Figueroa Street in downtown, reported a 20 percent decrease in sales from $51.3 to $41 million for the second quarter ended June 30. It eked out a net profit of $219,000 up from a $5.3 million loss the same period last year but primarily through a decrease in operating costs.
The company attributed the sales dip to "reduced demand by our customers due to the severe economic downturn and bankruptcies of retailers, such as Mervyn's that were significant customers in 2008." One bright note was that sales to Wal-Mart increased by $7.4 million.
Tarrant's major competitors include Liz Claiborne, Jones Apparel Group and Delta Apparel. Nationally, private brand apparel sales have recently dipped about 5 percent compared with last year to $82.6 billion, according to NPD Group Inc., a market research firm based in Port Washington, N.Y.
However, Ilse Metchek, president of the California Fashion Association, which tracks business expansion and growth in the apparel industry, said that Tarrant could have a bright future as private labels grow as a market segment.
Studies by the association, Metchek said, predict that by 2014 private labels will comprise 45 percent of the apparel industry, about 15 percent more than they do today.
"It's because the retailers are finding that private labels offer a higher margin and more profitability than if you're buying an existing brand and marketing it yourself," she said.
"It's obvious that (Guez and Kay) don't want anyone looking over their shoulders," she added. "If they have the cash to buy back their stock and would rather do that than invest in more equipment and factories, then that's a valid decision. They're buying total control, which is always a good idea."
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