Buffett's Guidance Lifting Fruit of Loom
Nov 22 3:55pm ET
By Deborah Cohen
CHICAGO (Reuters) - What does Warren Buffett see in Fruit of the Loom underwear? An undervalued brand, of course.
One of the best known names in apparel, Fruit of the Loom has been struggling with heavy debt and cut-throat competition, filing for bankruptcy protection two years ago. Now, the company is expected to emerge from bankruptcy as part of the legendary investor Buffett's empire.
Buffett's Berkshire Hathaway Inc. sewed up a deal to acquire the underwear maker for $835 million in early November. When the planned acquisition is completed next year, Fruit of the Loom is expected to halt a long-running price war that's hurt itself and the rest of the industry, analysts said.
Like many companies trying to raise cash while in bankruptcy, the underwear maker was forced to slash prices on its products to generate much-needed cash. Prices have plunged. A six-pack of Fruit of the Loom men's briefs sells at Wal-Mart for about $5.44, down from $5.96 two years ago, according to a published report.
If Fruit of the Loom, which has nearly a third of the market, ends the price cutting, No. 1 competitor Hanes underwear maker Sara Lee Corp. , which has been reluctant to respond to price cuts, is likely to breathe a sigh of relief, they said.
"The price differential between Hanes and Fruit became quite large. Price competition is clearly not a good long-term strategy," said Goldman Sachs analyst Romitha Mally.
Steep price competition is just one more indication of overall distress in textile industry, where bankruptcy is an increasingly common phenomenon. Just last week textile giant Burlington Industries Inc. filed for court protection, listing debts of $1.1 billion. And bankrupt apparel maker Warnaco Group Inc. said on Friday long-time Chief Executive Linda Wachner was leaving, and that Warnaco is considering the sale of the company.
While the industry remains challenging, analysts expect Buffett's company to take a more disciplined approach to managing the business on the way to recovery.
"The good news is that the pricing environment should become more consistent and less irrational," said Prudential Securities analyst John McMillin.
Fruit of the Loom ran into trouble under former Chairman William Farley, who bought the company in a 1985 in a leveraged buyout and later took it public. Farley, criticized for mismanaging the company and increasing its debt, resigned amid the ensuing bankruptcy.
Textile veteran John Holland, the company's long-time chief operating officer, was later reinstated to help turn the company around. He subsequently won the backing of Buffett, who cited his confidence in the executive as one reason for his buyout offer.
Fruit of the Loom holds the No. 2 position in the U.S. men's and boys' underwear market, with about 32.7 percent volume share for the 12 months ending in July. Sara Lee has about 36.5 percent.
A Fruit of the Loom spokesman acknowledged there has been a lot of industry discounting, but said the company did not initiate the price cuts. Canadian rival Gildan Activewear Inc. , which also submitted a bid for Fruit, has been the most aggressive, he said.
It's too early to discuss Fruit of the Loom's pricing strategy, the spokesman said. Details about that and other company strategy will come out early next year, after the completion of its auction in late December, when the company seeks court approval for the Berkshire bid.
SARA LEE UPS MARKETING
Chicago-based Sara Lee said it has refused to enter a pricing war, instead issuing a counter-attack through a heavy boost in marketing, including the use of sports superstars such as basketball legend Michael Jordan to promote Hanes.
Sara Lee executives were not available to comment, but a spokeswoman said the marketing strategy has helped the company win the crucial back-to-school season, with a gain of about 3.5 percentage points in the men's and boys' category in the three months ended in August.
Sara Lee has seen its apparel business pressured in recent years. The company, which also makes Playtex bras and L'eggs pantyhose, gleans about $7.8 billion, or about 45 percent of its total sales, from apparel. Its five-year compound growth rate for apparel sales has hovered around 1.1 percent, below its food and household goods divisions.
All of the U.S. textile makers have suffered from an influx of inexpensive imports, mostly from Asia. In a move to lower costs, many companies have moved their manufacturing outside the United States.
But the Berkshire deal is seen as a ray of light, a sign of stability in the struggling industry. It also could lead to a revival of a well-established brand once known for comical commercials featuring grown men dressed in fruit suits.
"It's a boost the textile industry desperately needs, getting an investor like this showing interest in the Fruit brand name," said Gary Taylor, senior vice president with Hohenberg Bros., the cotton unit of grain giant Cargill Inc. "We're all looking for positive signs."
Hohenberg, among Fruit of the Loom's largest unsecured lenders, is owed about $2 million in unpaid debts, Taylor said.
Shareholders lost essentially all of their equity after Fruit filed for bankruptcy protection in December 1999. The company said it owes about $1.2 billion to secured lenders and some $500 million to unsecured lenders. In the first nine months of the year, it generated operating cash flow of about $160 million. |
