(WSJ(B4): "Fruit of the Loom Bottoms Out Because of Production Troubles")
September 20, 1999
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Fruit of the Loom Bottoms Out
Because of Production Troubles
By JAMES P. MILLER
Staff Reporter of THE WALL STREET JOURNAL
CHICAGO -- Fruit of the Loom Ltd. is having trouble making enough underpants.
Last month, Fruit said second-half results would fall "significantly below" expectations because of "production and customer-service difficulties." And its longtime chief executive, William Farley, relinquished operating control.
Since undergarments aren't as complex as, say, microchips, Fruit's critics and investors are wondering why it can't iron out the wrinkles in its operation.
Dennis Bookshester, an outside director named acting CEO, says Fruit's computer system is to blame for some of the problems. "I don't know online every day what we own and what we're shipping," Mr. Bookshester says.
Now, he has computer consultants trying to fix the problem. A former retailing executive, Mr. Bookshester is in charge until Fruit can find a permanent successor to Mr. Farley.
Not 'Rocket Science'
The production problems are particularly galling because Fruit controls almost one-third of the U.S. men's and boys' underwear market. Its estimated 32% market share is second to Sara Lee Corp.'s Hanes, which holds about a 37% share.
Making clothes "isn't rocket science," says Donald Yacktman, whose Yacktman Asset Management Co., Chicago, holds several hundred thousand Fruit shares. It is "Business 101," he says.
For its underwear-making and other travails, Fruit has taken a beating on Wall Street. Fourteen months ago, its market capitalization stood at more than $2.5 billion. Since then, the price of its shares plunged 90%, and the well-known apparel maker now is valued at just $235 million. In New York Stock Exchange composite trading Friday, Fruit fell 12.5 cents to $3.50.
Meanwhile, Fruit expects to be in violation of some of its debt covenants by Sept. 30 and is negotiating with its banks for a waiver. "I expect to have the votes to get that" waiver, said Brian J. Hanigan, vice president and treasurer. He says Fruit has enough cash to meet obligations, including a $45 million debt payment in October, through the end of the year. After that, Fruit will need to sell noncore assets, or get an infusion of capital, to finance itself, Mr. Hanigan says.
Through the first six months of 1999, Fruit had a loss of $11.3 million, or 16 cents a share, on sales of $960.4 million. Analysts expect the company to post a full-year loss of perhaps $30 million.
Next CEO Has Much to Work With
"I went to a 'no estimate' for next year," says Merrill Lynch analyst Pamela Singleton, "because I do think one needs to know who's running the company and what is the strategy."
The next CEO will have much to work with. Fruit remains a powerful brand name, and so are the company's other brands, such as BVD and Gitano. Although the markets it serves are relatively mature, and despite competitive pressure from "designer" underwear brands that rivals make under license from Tommy Hilfiger and Calvin Klein, the company enjoys solid long-term relationships with the mass merchants that sell its T-shirts, underwear, jeans and activewear.
Its vertically integrated organization, in which it makes the cloth that other workers cut and sew into garments, historically has made Fruit one of the lowest-cost producers in its industry.
The change of guard at the top gives hope to some observers. A financier by training, Mr. Farley, 56 years old, took control of Fruit's predecessor company through a leveraged transaction in the mid-1980s, but trouble ensued. Financing difficulties forced him to unload vast portions of his once-substantial empire of apparel-industry holdings. As part of that retrenchment, his controlling stake in Fruit has fallen to a 31% voting position.
But through it all, Mr. Farley maintained his hold on the CEO position, and some observers say that has been a big part of the problem. "Under his leadership, the company has performed poorly for a number of years," Credit Suisse First Boston analyst Dennis Rosenberg says.
Adds Mr. Yacktman, the Fruit investor: "It would appear that he [Mr. Farley] would have been better off leaving the operating side to someone else."
Mr. Farley couldn't be reached for comment. Mr. Farley isn't involved in day-to-day decision, Mr. Bookshester says. "He is a nonexecutive chairman. He will be there when I need him."
Thin Talent Pool
Where did Mr. Farley go wrong? By shipping much of Fruit's production overseas in recent years, he cut thousands of jobs from the domestic work force and succeeded in reducing its cost structure. But the offshore strategy generated quality-control problems and complicated Fruit's production and inventory-control processes, critics say, at a time when the company's internal operations-management talent pool was thin.
Mr. Farley responded to weakening demand last year by sharply cutting back his company's mainly Caribbean work force. Later, the company conceded it had misread the market: With demand surging, Fruit struggled to locate workers and restart its facilities, and margins suffered because Fruit was forced to outsource some production. Mr. Bookshester said the computer problems contributed to that miscue.
The good news is that there was strong demand for Fruit's products, Mr. Bookshester says. Now, the company needs to iron out its delivery problems. "I'm very very optimistic," he says.
Fruit's problems involve "basic business blocking and tackling," fund manager Mr. Yacktman says. But "they're very fixable."
The 60-year-old Mr. Bookshester, a respected retail veteran, says Fruit is in the process of devising a new business plan and conducting a massive inventory review. Earlier this week, Fruit also named new manufacturing, distribution and sourcing executives.
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