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CORPORATE FOCUS – Tarrant’s Fortunes Unravel Amid Manufacturing Move

Wall Street’s interest in Tarrant Apparel Group is pretty worn and faded these days, a far cry from only a year ago.

The apparel firm, best known for making private-label denim jeans for women, has been downgraded by some analysts and dropped from others’ coverage altogether, and its stock recently hit an all-time low.

In the past year, the company has endured several senior management changes and has been forced to revise its earnings projections repeatedly, leaving investors and analysts at a loss.

And it has hurt the reputation of Chairman and CEO Gerard Guez, who helped make Sasson Jeans a household name 20 years ago. He has staked Tarrant’s future on changing it from a company that outsourced virtually all of its production to one that now handles its manufacturing in-house.

So far, the results of those changes have been troubling. Having traded as high as $48.63 last April, the company’s share price plunged to a 52-week low of $5.88 last week, in the wake of anemic earnings results, before recovering somewhat to close at $7.69 on March 29.

CEO Guez considers the selloff an overreaction. “You know how Wall Street is now, they look at three-month and six-month (earnings) and make a decision in minutes,” he said. “This is the first loss we’ve had in 60 quarters, we’re not talking about a trend here.”

Tarrant posted a net loss of $2.2 million (14 cents per diluted share) in the fourth quarter of 1999, compared with net income of $7.6 million (50 cents a share) in the same quarter a year ago.

For the full year ended Dec. 31, the manufacturer reported net income of $12.9 million (79 cents a share), about half the $24.7 million ($1.71 a share) reported in 1998.

Given that Tarrant was projecting early last year that it would post 1999 earnings of around $2 a share, the latest results signal that the company’s move to vertically integrate its operations through acquiring manufacturing facilities in Mexico has not gone well.

Analysts are upset that the company was so clearly off the mark in its predictions and are pessimistic about any immediate recovery.

“They’ve completely changed their business model from top to bottom,” said John Rouleau, equity analyst at Gruntel & Co. in Chicago. “There’s a lot of benefit from this type of strategy, and it is easy to understand. But it is hard to accomplish.”

Guez conceded that the transition has been difficult. “I don’t think anyone appreciated the giant amount of work it took in this company to run the day-to-day business while reinventing ourselves,” he said. “We had to spend more money than we anticipated.”

Last year, the company embarked on an expensive plan to bring its manufacturing of denim and twill products in-house. With retailers looking to lower costs through increasing order volume and favoring bigger manufacturers as a result, Tarrant spent millions consolidating its operations and building a factory in Mexico. But the costs have been considerable.

“Building an operation that size takes time,” said Pedro Bernal, an apparel analyst at Wachovia Securities in Charlotte, S.C. “And while building the infrastructure may be sound, when you can go out and source (materials and production) from anywhere in the world, that (outsourcing) has its own advantages.”

The company also took a hit when clothing retailer The Limited Inc., long Tarrant’s biggest client, decided to shift some of its business to Asian manufacturers last spring. The Limited went from comprising about two-thirds of Tarrant’s total sales to around 40 percent.

The loss of that business coincided with an earthquake in Mexico in June, which hurt shipments and prompted the company to revise downward its earnings estimate.

Gruntel’s Rouleau said the company needs to change its accounting system to take into account the change in its operating structure.

Apparently in an effort to do just that, the company replaced its CFO last year, but so far it hasn’t seemed to help. Nor has other turmoil at the top: Barry Aved, appointed president of the company last fall, abruptly resigned two weeks ago, citing personal reasons.

The tumult has not stopped analysts from being bullish on Guez and his team, but they expect the company’s share price to languish unless the new strategy starts paying dividends.

“I think the management team is pretty good. I think they know what they’re doing,” Bernal said. “(But) I don’t believe the stock will move (up) until the company starts to deliver on some of the goals they’ve set.”

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