By JASON BOOTH
Tarrant Apparel Group, one of L.A.’s most profitable public companies, has seen its share price plummet 40 percent in the last three weeks.
The drop was sparked by talks aimed at setting up a joint-venture apparel company with Burlington Industries, based in Greensboro, N.C. Analysts said that the discussions, which were cancelled on May 26, created uncertainty about the company’s future direction and that has dampened investor enthusiasm for the stock.
“People are not sure what it all means and are not sure how it will play out,” said Jeanne Kraus, an analyst at Van Kasper & Co. in San Francisco.
Tarrant is a leader in the “private label” apparel business. While most other publicly traded apparel companies produce and sell clothes under their own brand labels, Tarrant makes most of its garments on a contract basis. These clothes are then sold to department stores, which sell the goods under their own brand names.
That strategy has made Tarrant one of the most consistently profitable companies in Los Angeles. According to a recent Business Journal survey, Tarrant is the second most-profitable company in the county over a five-year period, with an average annual return on equity of 39.6 percent.
Since June 1996, Tarrant’s stock had risen from the $4 level to peak at $48 on April 19. It closed at $27.50 on June 3.
Tarrant executives were unavailable for comment. They did, however, release a statement on May 27 saying that the failed joint-venture talks will have no negative impact on earnings, which they projected will reach $2 per share for 1999.
Analysts partly blamed the fall on short-term investors taking profits at the first sign of trouble.
“The sell-off is completely overdone,” said Darren Barker, analyst at Wedbush Morgan Securities in Los Angeles. “A lot of people got into the stock for its momentum and didn’t understand the story.”
He said the Burlington joint venture would have given Tarrant access to a larger pool of customers, particularly Levi Strauss, which has a long-term relationship with Burlington.
As such, while Barker is confident that the company will continue to show strong profits, its growth may not be as rapid as it would have been had the venture succeeded, he said.