Perry Ellis International Inc. (PERY)
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1993, Perry Ellis International Inc. has experienced tremendous growth and is well
capitalized to continue growing through additional acquisitions to expand their product
Perry Ellis primarily contracts for the manufacture of its products through a worldwide network of quality manufacturers. The company currently uses approximately 130 independent suppliers, located in the Far East, other parts of Asia, Africa and South and Central America. Perry Ellis believes that its extensive sourcing experience enables it to obtain quality products on a cost-effective basis. Perry Ellis distribution channels include regional, national and international department stores, national and regional chain stores, mass merchants, green grass (i.e., golf related), specialty stores and corporate wear distributors through the United States, Puerto Rico and Canada. Their largest customers include Wal-Mart Stores, Inc., J.C. Penney Company, Inc., Mervyn's, Kohl's Corporation, and Sears Roebuck & Co.
The Company owns or licenses the brand names under which most of its products are sold. Their portfolio of brand names includes Perry Ellis®, John Henry®, Axis®, Manhattan®, PING® and Mondo di Marco® for dress casual wear, Cubavera®, the Havanera Co.®, Natural Issue®, Munsingwear®, Tricots St. Raphael®, and Grand Slam® for casual sportswear, Perry Ellis America® and Natural Issue for jeans wear, PING, Perry Ellis and Munsingwear for golf sportswear, Pro Player® and Perry Ellis America for active wear, NAUTICA® for selected product lines for sale to corporate purchasers and Jantzen®, Southpoint®, Nike® and Tommy Hilfiger® brands for swimwear and swimwear accessories. The Company also licenses its proprietary brands to third parties for the manufacture and marketing of various products, some of which Perry Ellis does not sell, including mens and womens footwear, fragrances, underwear, active wear, loungewear, and outerwear. In addition to generating additional sources of revenue, these licensing arrangements raise the overall awareness of the brands.
CEOCFOinterviews: Mr. Page, where was Perry Ellis International Inc. when you became its CFO; what attracted you to the company and what changes have occurred since your hire?
Mr. Page: I have been with Perry Ellis for two-and-a-half years having joined the company in May of 2001. At the time, the company had about fifty million dollars in revenues. Since then we have done a number of acquisitions and today our run rate in terms of revenue is in the hundreds of millions and our market cap is around 300 million dollars. What first attracted me was that Perry Ellis is a great brand name, so it was a good opportunity to work with one of the leading brand names in apparel. The company is in Miami, which is an attractive place to live and third, the company had an interest in trying to grow and become a major player in the industry. I believe my expertise is in doing acquisitions and mergers, and managing not only the process of doing deals but managing the process of integrating and assimilating companies after they have been acquired.
CEOCFOinterviews: Having acquired many different companies over the past period, what would you say are difficulties and challenges and how does Perry Ellis accomplish those integrations?
Mr. Page: The difficulties involved with acquisitions are almost always related to people. They are probably the biggest asset that you can acquire and they are the most difficult. There are almost always cultural differences and you have to be sensitive to those cultural differences while at the same time honoring the parent company, structures and systems, and policies of the parent company. You have to be sensitive without modifying your business model too much to accommodate the company that you have acquired, lest you get off track overall.
CEOCFOinterviews: What do you look for in a company when you are considering an acquisition and what will you look for in the future?
Mr. Page: In terms of acquisitions, we look for companies that have brands as opposed to private label companies. We are interested in companies with brands that either compliment or extend the family of brands we already own and give us opportunities to enter new channels of distribution or expand our business with existing customers by adding new product categories and types. It is looking to leverage the base that we have with something new that is synergistic. What we are looking for going forward is an extension of that; we are one of the largest pure mens apparel companies in the United States. We plan to start looking at companies that appeal to young men as opposed to just pure mens wear or womens accessory businesses and things that are outside of the core business that we have been known for in the past.
CEOCFOinterviews: Name brands are popular for a moment and then lose their appeal; how do you prevent that from happening and having a negative effect on the company?
Mr. Page: You prevent it from happening by managing the distribution where your product is sold. You have to market the product properly as well as support and stand behind the product so that it can maintain its level of distribution. In my opinion, brands fall out of fashion because companies get intoxicated with sales growth, which forces them into marginal distribution relative to the history of the brand. Once that happens, you start ruining the equity of the brand. Sometimes you have to be satisfied with a certain level of business. You can only get so big in some markets and then you have to look for other brands to grow. You cannot just take a brand and go with it forever, you have to be satisfied or your top-line growth will be counterproductive and you will make less money as you move down the distribution chain.
CEOCFOinterviews: Will you tell us about the manufacturing of your products?
Mr. Page: We actually do not own any manufacturing capacity; we are 100% import driven. We contract with over 100 different individual vendors overseas and around the world. That mix of vendors is constantly changing based on quotas, pricing, delivery, quality, etc. We have been a company that has not owned any manufacturing capacity for most of our existence. We look at ourselves as a model of what most apparel companies are today, which is a marketing, design and distribution company and not a manufacturing company.
CEOCFOinterviews: Often times we hear news about sweatshops in third-world countries that do the manufacturing for a name brand apparel line. How do you address that issue for Perry Ellis and is it an issue?
Mr. Page: We are concerned about who does the manufacturing and we have a set of what we call ethical sourcing standards that we require all of our vendors to comply with. We have an internal group that visits every factory that we intend to do business with and makes sure there is no child labor or forced labor involved and that each particular factory complies with all the local laws and that there are not environmental issues. To the best of our ability, we try to ensure that potential vendors are complying with all the standards that we have set. There is a 150 page book of all the various specifications and standards that people have to contend with, from a labor and environmental prospective.
CEOCFOinterviews: Are there geographic areas where you are not currently distributing clothing that you would like to be involved in?
Mr. Page: We are primarily North American in terms of our distribution. We have licensing arrangements with a number of people that produce products with our brands worldwide but we would like to have a bigger business in the European communities and we think China offers some interesting opportunities. We have a number of sourcing offices in China and we think we need to, in the short-term, start taking advantage of our presence there and start producing product for the Chinese market directly ourselves. Those would be the two big areas that we would focus on internationally.
CEOCFOinterviews: You have so many brands; how do you decide where to focus?
Mr. Page: We have to ration the marketing dollars that we have available and we do promote some brands at a higher level relative to their sales than others. We put the money behind the brand that we feel offers the most opportunities for growth, and brands that have licensing business associated with them. It depends on where those brands are selling and how we market and support those brands. There are many factors that go into which particular brand gets allocate resources. It is a constant issue to decide where we allocate those dollars. We do it based on the brands we feel have the most potential.
CEOCFOinterviews: Is the Hispanic market a growing area for you?
Mr. Page: The Hispanic market has been a huge growing market for us. We have been one of the innovators in mens apparel in terms of designing and distributing products targeted at the Hispanic market. We have brands called Cubavera® and the Havanera Co.®, which have been very successful in terms of sell-throughs and acceptance by consumers. We are looked at in the apparel industry as one of the companies that has an expertise in design and target-marketing Hispanic consumers.
CEOCFOinterviews: Are there many companies in the category of Perry Ellis?
Mr. Page: There are a few companies that have similar business models, but most of the bigger companies have one or two very large brands such as Tommy Hilfiger. One exception would be KELLWOOD; they have a big private label business and a number of brands. There is Oxford Industry, which acquired Tommy Bahama and they do a lot of business with various licenses that they have. We are probably the leading example of a brand portfolio strategy in the apparel world.
CEOCFOinterviews: Are companies coming to you with a desire to be under the Perry Ellis umbrella?
Mr. Page: We have a lot of conversations with people, and there are people that come to us that are interesting in talking because they know that we are an inquisitive company. We find out about businesses and we have found since we have been active acquirers that the flow of potential deals is infinite. A day does not go by that there is not a deal somewhere that we hear about.
CEOCFOinterviews: Does the tone of the general economy have much influence on clothing purchase and Perry Ellis Intl specifically?
Mr. Page: Over the long-term, apparel sales have grown at a little faster rate than the economy over the last four or five years. However, if you look at mens apparel it has not been a growth business over the last four or five years. It has actually declined and in this day and age, mens apparel seems to be more discretionary, as well as childrens and ladies. It seems to be the first to fall off in difficult times and the last to come back as times get better. The waters are a little muddy as to what is going on because there has been a significant amount of price deflation in the last few years driven by a pretty large over-supply of capacity worldwide. So prices get less and less expensive, unit volumes have increased and the total dollar value of those shipments have declined in the last four years, and that is in mens apparel, which is our primary market.
CEOCFOinterviews: Will you tell us more about the markets you want to get into?
Mr. Page: We have begun to have brands that appeal to women. We acquired the Jantzen® swimwear business from VF Corp. about eighteen months ago and with that we picked up licenses to produce Tommy Hilfiger® and NIKE® swimwear, which are primarily womens wear. So that gives us some access to the womens market and gets us out of just being a mens wear company. It gives us the opportunity to expand the Jantzen® brand in resort wear and womens sportswear. We just acquired a company called Redsand®, which is a surf brand and we are hoping we can expand that to juniors and we have another company called Original Penguin®, which is a retro young mens line and there seems to be a good demand for a junior line there. There are opportunities to acquire brands in juniors or missies or various areas. We have an accessories business that we acquired in the last year that makes mens belts and small leather goods. It is a profitable business and we are looking for opportunities to expand that and to add backpacks and handbags. There is a potential to make money in the accessory business. It is selling more products to the customers that we have.
CEOCFOinterviews: What are the challenges going forward?
Mr. Page: One of the biggest challenges we have is dealing with a shake-out at retail. The retail landscape is continuing to change and I think we will see a continuing consolidation at retail where the number of players will shrink. One of the reasons we are very aggressive from an acquisition perspective is that we believe that for long-term you have to be a large player to survive. Customers do not want to do business with 200 million dollar companies; they want to do business with billion dollar companies. I think that is one of our challenges, to deal with the continued shake-out that is occurring at retail as it occurs and dealing with how retailers decide to position themselves from a private label vs. branding strategy. One of the reasons we are glad we have a portfolio of brands is because we can offer different things to different retailers and give them some exclusivity, which all of them say they are looking for. We have to fight for shelf space everyday, not only with our other suppliers but our biggest competitors that are our own customers. They all have their own private label groups and they all have different philosophies on how much of their open-to-buy dollars they are going to source internally. That is our biggest challenge, to continue to make sure our brands are relevant and the stores have a reason to put our brands in their stores.
CEOCFOinterviews: Why should potential investors be interested, and what should they know that they may not realize when they look at the company?
Mr. Page: The company has a great growth system ever since it went public in 1993. We were a 30 million dollar company in 1993 with 30 employees and now we have an annual run rate in the hundreds of millions with about fifteen hundred employees, and I do not see anything that is going to slow down the growth of the company in the foreseeable future. We are thoroughly well capitalized and we have opportunities to acquire businesses. We have a long-term strategy for growth and probably what people do not realize is that the company does have plans to address the liquidity issues in terms of the number of shares out there that are available to trade. That would seem the biggest drag on attracting investors; there just are not many shares in the public flow. As we have said in a number of conference calls and other venues, the company is aware of this issue and we are ready to address it.
CEOCFOinterviews: In closing, how do you see the role of CFO these days, given the various corporate scandals of the last few years?
Mr. Page: From my perspective, I do not think that the way we run our business has changed all that much. We have always been focused on controls and have made sure that we have had up-to-date information. We are centralized in terms of our management of financial statements and management here is very hands-on and involved in the day-to-day running of the business. It has not had much affect other than that we had to formalize and document a lot of the processes and things that we have done. My biggest challenge is dealing with people, and finding and attracting good quality people. As organizations grow, you have to constantly be assessing whether the people that you have are capable of taking you to the next level. That is a big part of what we do.
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