L.A. specialty shops becoming attractive buyout targets.

When Neiman Marcus Group Inc. was snatched up last week by private equity funds Texas Pacific Group and Warburg Pincus, the $5.1 billion deal illustrated something the apparel industry already knew quite well: consumers are hungry for specialty products.

That hunger, coupled with the pending merger of Federated Department Stores Inc. and May Department Stores Co., has large retail suppliers such as VF Corp. and Liz Claiborne Inc. veering away from their usual staples of professional wear and casual jeans. They're heading to Southern California to swoop up locally abundant "lifestyle" apparel brands.

And with recent pick-ups paying off, apparel industry analysts say that the pace of acquisitions isn't likely to slow.

They point to the purchases of Los Angeles-area C&C California Inc. and Juicy Couture Inc. by Liz Claiborne Inc. The New York-based apparel maker shelled out $28 million this year for C&C California, a maker of women's tops, and about $50 million in 2003 for Juicy, plus possible future payouts for both. Then there was VF Corp.'s $396 million purchase last year of Vans Inc.

"I think the large companies are going to continue to seek out these acquisitions because they have an appetite for growth," said Richard Giss, a partner in the consumer business practice at the L.A. office of Deloitte & Touche LLP.

The growth potential for the core brands of companies like Liz Claiborne and Pennsylvania-based Jones Apparel Group Inc. is limited. To satisfy stockholder demands, suppliers must foster new lines internally--an arduous task--or buy other companies so they expand retail offerings.

That's expected to become harder with the department store consolidation, which will eventually cut down total retail space.

"If you go to any store that has a Liz Claiborne department, that department could not possibly get any bigger," said Ilse Metchek, executive director of the California Fashion Association. "The only way they can grow is to expand their reach into other departments."

It's a guessing game to pin down the next companies on suppliers' shopping lists. Possible targets being mentioned include Paris Blues Inc., a Rancho Dominguez-maker of jeans for juniors and Hot Kiss Inc., the Los Angeles-based junior apparel manufacturer. A smaller company like Los Angeles-based Mo Industries Inc., which produces voguish Ella Moss skirts and tops, could develop into the next C&C California.

Hot Kiss declined to comment, and the other companies did not return phone calls.

Limited supply

As more apparel manufacturers get picked off, the ones that remain available for sale are getting smaller and smaller. Not too long ago, Metchek said suppliers principally looked to buy companies that had $100 million in annual revenues or more, but they are now willing to look at smaller prey.

Paul Buxbaum, chairman of the Calabasas-based Buxbaum Group, a turnaround firm charged with righting Rampage Clothing Co., said suppliers still would like annual revenues of potential acquisitions to range from $50 million to $100 million. But more importantly, he said, the smaller companies are "evaluated by their penetration to the market, their sales and margins, and then what their marketing capabilities are and what kind of depth they can have for growth."

Juicy, for example, has seen its revenues rise to an estimated $200 million last year from $47 million in 2002. Since its acquisition by Liz Claiborne, the brand has dived into accessories and opened its first stand-alone store in Las Vegas.

"They are widening their horizon," Buxbaum said.

For the smaller manufacturers, a buyout can ease the path to accelerated growth--an alternative to going public in an environment that requires costly and extensive auditing. A larger partner also can improve display placement in the stores and take over back office operations.

At the same time, small companies look attractive to larger, more-established companies because they have so-called "lifestyle" cachet--brand recognition beyond their product lines. The lifestyle brands include high-end L.A. denim companies, which have been acquisition targets for several years, as well as other pricey clothing and active sportswear clothing companies.

"Our disciplined approach to acquisitions is really based on finding lifestyle brands that have authenticity, meaning they are real to their audiences," said Tim Pittman, a spokesman for VF, headquartered in Greensboro, N.C. "Some of the most interesting brands are on the West Coast."

Authenticity is critically important in reaching the younger shoppers. With the purchase of San Diego-based Reef Holdings Corp. this year, VF has chosen to expand its sportswear component, which is the fastest-growing apparel category under the VF umbrella. From 2003 to 2004, that component nearly doubled to over $1 billion in sales, while the company's core jeans business, which includes Lee and Wrangler, stayed essentially flat at about $2.6 billion in annual sales.

"The demand for the brands representing the lifestyle is high, and it is a customer segment that is hard to reach," said Christy Glass Lowe, a managing director at Santa Monica-based investment bank USBX Advisory Services.

Apparel industry experts note that the acceleration of the buyout process has been pushed along by the tendency of Hollywood celebrities to latch onto the stylish offerings of new manufacturers. For example, Jennifer Lopez wore Juicy jeans before launching her own line.

Part of the goal is to attract sales in the international market, where tastes for California goods and a fascination with Hollywood are stronger than ever.

The danger, of course, is that once a company joins a larger entity, it loses touch with what's driving fashion.

"The one advantage that small company has is that they are very nimble," said Giss. "Quite often it is hard for a large company to turn that company around quickly."

Plenty of acquisitions have stumbled. New York-based Nautica Enterprises Inc., now owned by VF Corp., bought Earl Jean Inc. in 2002, but after management shake-ups the brand slipped. Now buyers are more aware of the importance of keeping the management team together.

"Management is key when you acquire a brand," said Dick Baker, chief executive of Ocean Pacific Apparel Corp., now owned by Warnaco Group Inc. "You have to keep them committed to the brand going forward otherwise you have a risk in your investment."

Fresh Trends

Local apparel makers are a favorite for larger buyers.

Company                          Buyer             Date      Price

C&C California Inc.     Liz Claiborne Inc.         2005    $28 million
Reef Holdings Corp.     VF Corp.                   2005    Undisclosed
Vans Inc.               VF Corp.                   2004   $396 million
Juicy Couture Inc.      Liz Claiborne Inc.         2003    $50 million
Ocean Pacific Apparel   Corp. Warnaco Group        2004    $40 million
Earl Jean Inc.          Nautica Enterprises Inc.   2001    $86 million