Rag Trade's Bottom Line Plunges

— In corporate slang, the garment industry is lovingly called "the rag trade." But in recent years, the rag trade has been ragged: people at all income levels haven't been spending as much of their disposable income on apparel.

High fashion is still around, but it's not as pervasive as in the past. Even debutantes wear jeans now, and not necessarily designer jeans. With more wealth and income concentrated in the upper 1 percent of the population, the apparel industry suffers from the top of the line to the bottom.

Most industries fear inflation, but "the apparel market has been marked by deflation," says San Diego-based Nitches, an importer and wholesaler of men's and women's garments, in its most recent annual report. As retailers continue to merge, chains demand lower prices from suppliers such as Nitches, whose profits necessarily plunge.

Marie Driscoll, analyst for Standard & Poor's, sees continued "deflationary pricing pressures." Apparel companies may intensify the price-slashing to get on the shelves of discounters and mass merchandisers. One demographic reason: as the population ages, people focus more on retirement, health-care costs, and children's tuition. Apparel goes to the back of the closet.

Industry trends should surprise no one. In recent decades, the gap between rich and poor has widened sharply -- enough to alarm both liberals and conservatives. According to United for a Fair Economy, the top 1 percent of households has more wealth than the bottom 95 percent combined -- a gap not seen since the 1920s. Between 1977 and 1999, the top one-fifth of households increased their annual income by 43 percent, while the top 1 percent went up 115 percent. The middle fifth rose 8 percent and the bottom fifth went down 9 percent.

A study by economists Thomas Piketty and Emmanuel Saez indicates that in 1915, the wealthiest families earned 400 times more than the average family. Then the middle class gained. By 1970, the superrich brought home only 50 times more than the average folks. But by 1998, it was back to 250 times, and it's certainly much higher now. In short, we're close to being back to the Gilded Age. The difference is that today's glitterati shell out comparatively more for the latest electronic devices and less for regal gowns.

Clothing sales hit $176 billion in 2000 and declined for three years, says Marshal Cohen, chief apparel industry analyst for NPD Group, a market research firm. In 2004, sales rose 4 percent to $173 billion -- still below the level of 2000. Figures for 2005 aren't in yet, but there was steep apparel price-slashing during the Christmas selling season.

And here's a shocker: "Many consumers who traditionally shop in high-end luxury stores are now shopping at value stores as well," says Cohen. Goodness! The debutantes not only wear jeans, they buy them at Wal-Mart.

Nitches contracts out the manufacture of its cotton clothing lines to low-wage countries such as Cambodia and Pakistan. It sells primarily through discounters and is vulnerable. One retailer accounts for more than half of its sales.

Sales dropped from $39 million in 2000 to $26 million last year, while profits vanished. The company lost $1.2 million in its most recent year. The stock has been cut in half from its 2004 peak. Stock analysis firm Morningstar Inc. says that Nitches' financial position gets a grade of C, while growth rate gets a D-minus.

Charlotte Russe Holding, also based in San Diego, offers trendy clothes to young women at a 25 percent discount. The company has more than 400 stores and continues to open new ones rapidly. In 2001, the stock almost hit $40. Now it's about half that, but in 2004 it was below $10 for a while as problems mounted.

From 2000 through 2005, sales more than doubled, from $245 million to $604 million. But that's because of the new store openings. Actually, sales per store peaked at $2.1 million in 2000 and dropped to $1.6 million in 2005. Sales per square foot peaked at $286 in 2000 and dropped to $228 in 2005.

Recent numbers have been perky: fourth-quarter sales zoomed 30 percent. Chief executive Mark Hoffman says the company is back on track "in spite of the significant competitive market pressures." But a report in late December by Wall Street's Goldman Sachs indicated that Charlotte Russe was among a group of retailers slicing prices aggressively during the holiday selling season.

A year ago, shareholders sued the company and two of its officers, alleging that it was not telling the truth to investors about its marketing failures. On February 14 of last year, San Diego law firm Finkelstein & Krinsk charged that Charlotte Russe management had inflated the stock by concealing the fact that "inventory was grossly overvalued" and top personnel had "fled the company." More suits came and were consolidated. Late last year, the company agreed to pay $3.9 million to settle.

Carlsbad's Ashworth sells golf clothing almost entirely through the "green grass" market, consisting of pro shops, resorts, golf specialty shops, and the like. It also sells a small amount through plutocratic stores such as Bloomingdale's, Lord & Taylor, and Nordstrom.

It specializes in upscale merchandise made overseas -- 88 percent in Asia and 12 percent in places such as Central America and the Caribbean. Sales rose steadily from 2000 forward, but that is misleading. The company made a major acquisition and also began selling clothing provided by its Carlsbad neighbor, club and ball maker Callaway. Those additions boosted sales.

The company's main product line, Ashworth, has shown some resiliency in the teeth of a moderate decline in people playing golf, but this company has problems. The stock hit $18.38 in 1998, when analysts thought golf would take off, but has recently been trading at half that. The company lost $2.2 million in its fourth quarter as it slashed prices. It was late filing its report. Some key officers and directors have resigned, and one large shareholder wants the company to put itself up for sale. It is exploring the prospect.

"The quality of Ashworth clothes has fallen in recent years; this is surely not the leading company it used to be," says Bud Leedom, publisher of the California Stock Report. Morningstar gives Ashworth a C grade for financial position.

Ashworth, too, has been hit with lawsuits. In 1999, San Diego class-action attorney William Lerach sued the company, claiming its accounting did not follow generally accepted principles. Other law firms joined in. In November of 2004, the company agreed to settle, coughing up $15.25 million.

Carlsbad's Phoenix Footwear Group was founded in 1882 in New England. In 1999, the company, beset by rising costs, stopped making shoes in the United States and became an importer. It moved from Old Town, Maine, to Carlsbad in 2003. In recent years, it has made several acquisitions, expanding its shoe line and also going into outdoor and travel apparel.

In its most recent quarter, sales surged 48 percent, but profits were halved. The sales gain came primarily from two recently acquired brands. Older brands were flat. Morningstar gives Phoenix's financial position a D grade.

In San Diego County as elsewhere these days, rags are no route to riches.

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