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Anyone Follow TSIC?

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By howardroark
May 20, 2003

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What do you want to know [about Tropical]? Well, everything.

Well, how about everything I can squeeze out in eleven minutes?

Tropical is a middleman apparel marketer, primarily selling pants in North America. Their model is a bit unusual in that they bifurcate the sourcing process by doing their own domestic cutting (in Tampa) but outsourcing all of the labor-intensive sewing (largely from Mexico, the Caribbean and Central America). They also have been very disciplined about drawing between the lines (as opposed to constantly changing how they are made which the is fashion wholesale equivalent of reaching for yield) in the design and development of their core products (2/3 of their business), and as result have developed some pretty efficient processes for doing what they do. The end game of that has been that Tropical has the shortest true production cycles in the industry (other big players are Haggar, Levis, VF), which they've shaved from something like 50 days to around 25 over the last decade. That [is] best in class by a large margin, and those turnaround times have obvious appeal to retail customers.

TSIC parlayed their design and dish efficiencies into a series of automatic replenishment relationships with important retailers like KSS and JCP, the most notable being WMT. These replenishment deals are attractive for someone like TSIC because they impose some switching costs on customers in what is otherwise a generally crappy business (unless you happen to own a brand like, say, Dockers, which they don't). I think it would surprise a lot of people to know that WMT, the king of category management and inventory logistics, essentially hands the ball to TSIC and says 'do it for us.' By do it for us, I mean, figure out what to buy (from yourself), when to buy, when to deliver and when to reorder (for the most part). So, despite selling into a consolidating customer chain and shrinking department store channel (around 1/4 of sales, customers include Federated, Saks, DDS, May), with a few decent brands (Savane, Farah) but mostly mediocre stuff (Bay to Bay, Banana Joe) and a lot of notoriously low margin private label (Puritan, Sonoma, Charter Club), they managed to be a pretty decent business over the last several years. Landmark event was the acquisition of Farah in '98, which brought in their two biggest owned brands (Farah and Savane) and brought them upstream a bit.

What it hasn't been, and will never be (besides a great business, which is a given), is a predictable business. They missed their number or warned no less than eight times in the last three years, which is an unofficial modern day record, while always claiming they had "good visibility into the future." The capital markets were always there for them, though, and they managed a high yield deal and then, last summer, they pushed out a secondary at $21 a share. Then things really went to hell. Tropical was trying to consolidate their domestic cutting from two facilities to one, by shutting down their El Paso Savane ops and folding it all into Tampa, which they optimistically dubbed Project Synergy, which seems not unlike naming your first born Richandhappy. At the same time, they were prancing off into mind-numbingly inane new directions, like launching a new Victorinox (Swiss Army pants) line and buying things like Duckhead retail stores.

Well, Project Synergy has turned into Project Valuesuck, as TSIC had major, perhaps unprecedented problems consolidating their cutting. They were left completely unable to provide timely product to their most important and powerful customers, when providing timely product is pretty much the reason they exist. The costs of the restructuring, on the other hand, didn't fall short. Meanwhile, Bill Compton, the evangelical Chairman and CEO of TSIC, abruptly resigned in the midst of yet another earnings miss thanks to the Project Synergy meltdown (this is late last year now) and a worsening retail environment, with a press release enigmatically indicating that something less than kosher was behind it, but throwing in a non-sequitor quote implying he was leaving due to serious health problems. The company wouldn't comment on details, but a few days later the Tampa Tribune broke the story that the rest of management had discovered that Compton was a follower of the Dennis Koslowski school of corporate fund mingling, and was taking friends to Disney World and buying linens on the company dime, among other things.

With Compton out, COO Chistopher Munday took over and one of the original principals (along with Compton), Michael Kagan, came back to be Chairman after having recently retired. The Project Synergy hangover continued into Q1, and combined with a crappy apparel sell through market, to produce the worst gross margins they've seen in nine years. Tropical stopped providing earnings guidance and announced they were ditching the Victorinox license and shutting down their Duckhead stores to focus on the core business. Their secondary hawks, RBC and Merrill, have all but thrown in the towel, though thus far they haven't lost any customers over the missteps. Okay, I'm over my eleven minutes so I don't have time for the numbers, but you know where to find 'em.

One fast final point. People who think that Tropical is a SARS play (because they primarily source from Central America) are kidding themselves. From conversations I've had with major apparel sourcers from the Far East, the press has thus far blatantly overblown the practical impact on procuring product from Asia. Plus, you have to understand the apparel sourcing industry is one of the most diverse, nimble value chains in the world, and there's a whole lot more skilled sewing and assembly labor in the world today than just Southeast Asia. Even smaller marketers like Perry Ellis can source from over 30 countries on a dime, and most of these guys aren't even having significant problems with their Asia sourcing. It's conceivable that SARS creates some very short-term, very small advantage for someone like TSIC, but I seriously doubt it could be significant under any reasonable circumstance. The bigger question is what happens to Tropical's sourcing economics once China's quotas are theoretically relieved in 2005, but I don't have time for that one right now.


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