Too Much Pruning Stunts Fruit Of The Loom

Wrong move, wrong time. Late last year, Fruit of the Loom Inc. saw underwear and apparel sales slowing. It cut back production sharply. Too sharply, in fact: In February, almost overnight, demand soared. Caught with its shorts down, the company hired back thousands of workers and frantically ramped up production--but Fruit still stands to lose $200 million in sales this year.

The result: A very public mea culpa. On May 17, William Farley told reporters after Fruit of the Loom's annual meeting that the miscalculation already has cost the company $40 million in lost sales and in costs related to firing and hiring. "We'll be forced to leave significant dollars on the table," he says. Analysts think profits should drop by 11% for the year, to $185 million.

This was the same Farley who once appeared in TV ads, doing sit-ups in a tank top, to pitch casual wear. In the 1980s, the irrepressible dealmaker and self-promoter picked up a conglomerate, Northwest Industries, followed by textile giant West Point-Pepperell Inc. He mulled a 1988 Presidential bid. By 1991, with his empire collapsing into bankruptcy, Farley just managed to stave off liquidation and hang on to Fruit.

WHIPSAW. Farley, now 51, has kept his head down since, concentrating on pushing Fruit underwear and sweatshirts around the world. And sales and earnings have grown steadily since 1987.

Until last year. Early in 1993, Fruit increased production across its clothing lines, figuring that a recovering economy would lead to higher demand. But despite aggressive retailer promotions, growth didn't materialize, and inventories rose to record levels (chart).

In the fourth quarter, Farley took drastic action, laying off 2,000 workers at 41 U.S. plants. Output dropped--just as consumers began to load up on new clothing. Executives aren't sure why demand rebounded but guess that "it was an accumulated impact of people not buying for a long time," a spokesman says. First-quarter earnings dropped 43%, to $25.1 million.

Competitors were caught in the same whipsaw: Sales of knit products at Sara Lee Corp., maker of Hanes underwear, jumped 17% during the quarter ended Apr. 1, following on the heels of two flat quarters. Still, analysts fault Fruit's inability to adjust. The company's explanation "clearly strikes me as rationalizing," says Steve Johnson, a managing partner at Andersen Consulting. "It was an operational problem on [Fruit's] end."

Fruit's snafu is especially untimely, coming just as Farley is driving the $1.9 billion company on an acquisition spree into new markets. In March, the company paid $100 million for the assets of Gitano Group Inc., a mass-market blue-jean and women's casual wear company that was in bankruptcy. The idea is to push Gitano through Fruit's powerful distribution network among mass merchandisers. And Fruit is negotiating to buy the license to the Calvin Klein jean label.

"STYLISH." Yet there are risks. The new strategy takes Fruit into the more volatile fashion-sensitive end of the clothing business. What's more, Fruit's current strengths are in knitted items, not wovens such as jeans, notes Wertheim Schroder & Co. analyst Thomas J. Donatelli. Not a problem, says Farley. "Our apparel will be slightly more fashion-stylish, not trendy. We will be more like L.L. Bean, J. Crew, or Eddie Bauer."

It's crucial that Farley make the new deals pay off, now that his post-bankruptcy campaign to bolster credibility is suffering. He has spent more than $1.1 billion on new factories and improved technology since 1985 to make Fruit into a low-cost producer. The company commands a leading 40% market share in men's and boy's underwear in the U.S. Through savvy marketing, moreover, Fruit has made the famous apple-and-grape logo a hot label on premium-priced casual wear in Europe.

Some shareholders, though, remain wary in the wake of the recent financial troubles. They have seen their Fruit stock, which rose seven-fold since 1991 to a peak of $50 last year, settle back to $30. Kemper Financial Services Inc. sold its 2.4% stake early this year when it became concerned about Fruit's outlook, says portfolio manager Bess Cotner. And a group of shareholders filed suit in late December, charging that Fruit misled investors about the weakening state of business.

Farley has lost none of his boosterism. What will it take to win back investor confidence? "A good second and third quarter," he says. "It's that simple." He's learning, though, that the rag trade is anything but.

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