Here's An Interesting Retail Stock
(Saw your comment regarding how few seem to follow retail sector. Here's one that you might find of interest. Tarrant Apparel has more than doubled since March and is up 450% in last 2 years. With moves like that dunno why most only seem to want to follow only tech or oil stocks. In particular check out money flow and On Balance Volume into this stock. Cheers!)
Heard in California: Clothes Call: Why Analysts Are Enthusiastic Over Tarrant Apparel
June 3, 1998
----
By Brenda L. Moore Staff Reporter Of The Wall Street Journal
As part of the "private-label" clothing industry, Tarrant Apparel Group may never become a household name among shoppers. But it has been making quite a name for itself lately on Wall Street. Since early last month, at least five analysts have raised their earnings estimates for Tarrant, and two have boosted their ratings -- one to a "buy" from a "hold" and the other to a "strong buy" from a "buy."
The actions largely reflect two moves by the Los Angeles-based company, which has specialized in women's casual clothing since it was launched in 1985.
The first was the acquisition in late February of Los Angeles-based MGI International, a maker of men's and boys' apparel, for $7 million. The purchase, analysts say, is already pumping up Tarrant's revenue, broadening its product lines and giving the company new outlets for its wares. Among them: JCPenney and Goody's Family Clothing.
The other development is a continuing production shift from Asia to Mexico, where Tarrant is attempting to buy a denim mill and is building a twill plant and distribution center.
The transfer is the cornerstone of a "vertical integration" plan under which the company will assume direct control over more of the apparel-production process and rely less on outside vendors. In turn, analysts say, Tarrant should be able to reduce costs and turnaround time. "Vertical integration -- that's really the significant deal here," says John Olinski, an analyst for Wedbush Morgan Securities in Los Angeles, who rates Tarrant a "buy." "We are convinced the industry is consolidating and companies that can vertically integrate will prosper."
Yesterday, Tarrant shares soared $2 to close at a new 52-week high of $17.75. Company officials said they didn't know of a reason for the rise. And even with the increase in the stock, analysts still point to potential upside; Mr. Olinski, for instance, has a 12-month price target of $21.
Tarrant's togs can be found draping a mannequin at Limited or filling a rack at Target -- but you'd never know it. That's because the company designs and makes private-label clothes that are then sold as one of the store's own house brands, including Target's Cherokee and Limited's Limited Jeans. "We are known to our customers as the people who help them brand themselves," explains Gerard Guez, Tarrant's chairman and chief executive.
Private-label clothing may seem like a country cousin next to the well-known brand names in fashion. But in terms of growth, it's becoming more of a big brother. According to a study by NPD Group, a New York market-research company, shoppers are spending an increasing amount of money on private-label and proprietary brands (which are still owned by the manufacturer but marketed through a single client).
In 1990, private-label and proprietary brands accounted for 38% of the total amount spent on women's clothing. By 1997, that figure had climbed to 48%. In men's clothing, meanwhile, the same segment rose to 38% of the market from 35%, the NPD study found.
As the private-label sector has boomed, so have Tarrant's fortunes. Earnings for the first quarter, announced last month, rose 33% to 20 cents a diluted share. And the Street's consensus earnings estimate for 1998, according to First Call, is $1.15 a diluted share -- a 44% jump over last year's 80 cents. (All figures reflect a 2-for-1 stock split that took effect May 8.)
Looking ahead, Mr. Olinski says Tarrant's revenue could soar to more than $500 million within three years -- or roughly double the $260.1 million it posted in 1997. Revenue is projected to hit about $330 million this year.
The anticipated increase partly reflects the MGI International acquisition, but also the fact that the Mexican denim mill can produce more fabric than Tarrant currently needs. Tarrant could sell the excess, but several people on Wall Street expect it to acquire more companies to help absorb the production. (Mr. Guez won't comment on any specific plans.)
Still, risks remain. The biggest, analysts and investors say, may well be a client base that is, quite literally, too Limited. Even after buying MGI International, some two-thirds of Tarrant's business is with five clothing chains owned by Columbus, Ohio-based Limited, including Express, Lerner New York and Lane Bryant.
Although Tarrant maintains separate contracts with each of the chains, "we've never been able to get comfortable with their exposure to Limited" as a whole, says Bryant Riley, president of B. Riley & Co. in Los Angeles, who rates Tarrant's stock a "neutral." "I've just seen too many times where the customer comes in and says, 'Business has been hard and we're going to cut our suppliers.'"
Yet how to handle Limited is something of a tricky matter. Bob Mancuso, small-cap portfolio manager at Glenmede Trust in Philadelphia, agrees that "the major downside" for Tarrant "is if something goes wrong at the Limited." On the other hand, he stresses, Tarrant has to be careful as it tries to diversify. Limited is "a great customer, and they don't want to screw that up," says Mr. Mancuso, whose portfolio includes about 275,000 Tarrant shares, or a 2% stake.
Yesterday's upsurge in Tarrant's stock comes atop a lift the shares got just last week. That was after a federal judge in Cincinnati upheld a 1997 ruling that dismissed a claim against Tarrant and Limited brought by the American Textile Manufacturers Institute. The Washington trade group had alleged that Limited and Tarrant made false statements to the Customs Service about the origins of some of their imports in an effort to evade U.S. limits.
Despite the rise in the stock, however, Tarrant continues "trading at a discount to both its growth rate and the market," says Holly Guthrie, an analyst with Janney Montgomery Scott Inc. in Philadelphia, who also has a price target of $21. The firm recently raised its rating on Tarrant to a "buy."
Indeed, many expect that as more of Tarrant's operations are moved south of the border, the company's earnings will head north. Jeanne Kraus, an analyst at Van Kasper & Co. in San Francisco, notes that gross profit margins in the first quarter rose to 17% from 16% -- and she projects that they'll reach 17.5% in 1999.
Mexican production suffered "growing pains" last year, says Ms. Kraus, who recently increased her rating on Tarrant stock to a "strong buy" and has a 12-month price target of $21. But the company is now "getting the benefit."
Dow Jones Newswires -- May 6, 1998
Tarrant Apparel 1Q Net 20c/Diluted Shr Vs 15c
Tarrant Apparel Group - Los Angeles
1st Quar March 31:
1998 1997
Sales $64,257,000 $53,605,000
Net income 2,780,000 2,021,000
Avg shrs (basic) 13,281,262 13,110,462
Avg shrs (diluted) 13,756,100 13,543,234
Shr earns (basic)
Net income -a .21 .15
Shr earns (diluted)
Net income -a .20 .15
a. Adjusted to reflect a 2-for-1 stock split, effective May 8, 1998. On a pre-split basis, basic and diluted earnings per share would have been 42 cents and 40 cents, respectively, for the latest first quarter and would have been 31 cents and 30 cents, respectively, for the year-ago first quarter.
Tarrant Apparel Group (TAGS) said greater-than-expected sales and
ongoing gross margin improvement boosted latest first quarter results.
The maker of private-label, casual apparel said it believes its attention to the fundamentals of the business will enable the company to reach sales of more than $330 million in 1998.
In the year ended Dec. 31, Tarrant reported sales of $260.1 million. |
