FOOL PLATE SPECIAL
An Investment Opinion
Mossimo Targets an End to Its Mess-imo

By Dave Marino-Nachison (TMF Braden)
March 29, 2000

Another episode in the soap opera of fashionable sportswear designer and maker Mossimo Inc. (NYSE: MGX) and its founder, Chairman and Creative Director Mossimo Giannulli, opened today as the struggling apparel marque announced a deal that will tie its fortunes tightly to that of retailing power Target Stores (NYSE: TGT).

Mossimo will contribute design services to Target, licensing its trademark to the company in the U.S. in exchange for royalties with "substantial" guaranteed minimum payments. Though financial details of how the deal aren't known, the pair is apparently counting on the deal to generate $1 billion in sales over three years beginning in 2001.

For Target, this reads pretty much like "just another licensing agreement" and Mossimo's press release even tried to characterize it as such, noting the chain's success in commoditizing housewares by the likes of Michael Graves and Phillipe Starck.

For Mossimo, though, this seems like a significant departure from its history and could make or break the company. It has a history of licensing its trademarks for eyewear, women's swimwear and bodywear, men's neckwear and suits, dress shirts, and men's hosiery -- but the business of design, sourcing, and marketing has always been its primary stock-in-trade.

With that emphasis apparently ready to shift, the company will be streamlining in a play to get costs under control. Now Mossimo is preparing employees and investors for "a significant number of layoffs" as it cuts back to, for the most part, design and finance operations.

Among those saying good-bye will be CEO Edwin Lewis, who came on in December 1998 to replace cost-cutting specialist John Brincko, whose arrival signaled Gianulli's move away from daily operations to what the founder called a "visionary" capacity. Lewis, who resigned, will stay on as an advisor. The former Polo Ralph Lauren (NYSE: RL) and Tommy Hilfiger (NYSE: TOM) exec couldn't reverse the company's sliding share price, and the tough times are far from over.

That's because the Target deal doesn't start until May 2001, leaving Mossimo in need of short-term financing. Its independent public accountants have sent word that unless it can get a new cash influx -- there was $473,000 in cash on the balance sheet as of Dec. 31, and fourth-quarter operating losses were $6.7 million -- it may not be able to stay in business. Mossimo is busily looking for ways to fund "anticipated operating shortfalls" in the interim.

The company could use its revolving credit facility to fund operations, but without reading Mossimo's annual report it's tough to tell how much it could get from its lenders. At most, based on its most recent balance sheet, it looks like about $3.5 million using the formula described in the third-quarter 10-Q (85% of eligible receivables and 50% of eligible inventories, though it's not clear what "eligible" means).

So someone from the outside will have to fund Mossimo for the next year or so. In what manner or to what degree that happens might be the best indicator of where this company is heading since a potential cash investor, assuming it does extensive due diligence, will likely have better access to information about where this Troubled company may be headed.

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