Algo Group Inc.

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Algo Group Inc.

225 Chabanel Street West, Suite 1100
Montreal, Quebec H2N 2C9
Canada
(514) 382-1240
Fax: (514) 382-4436

Public Company
Incorporated: 1942
Employees: 500
Sales: C$202.l4 million (1996)
Stock Exchanges: Toronto Montreal
Ticker Symbol: AO.A
SICs: 2337 Women’s, Misses’, & Juniors’ Suits, Skirts, & Coats; 2321 Men’s & Boys’ Shirts, Except Work Shirts; 2325 Men’s & Boys’ Separate Trousers & Slacks; 2329 Men’s & Boys’ Clothing, Not Elsewhere Classified; 2331 Women’s, Misses’, & Juniors’ Blouses & Shirts; 2335 Women’s, Misses’, & Juniors’ Dresses; 2339 Women’s, Misses’, & Juniors’ Outerwear, Not Elsewhere Classified; 2361 Girls’, Children’s, & Infants’ Blouses & Shirts; 2369 Girls’, Children’s, & Infants’ Outerwear, Not Elsewhere Classified; 2221 Broadwoven Fabric Mills-Manmade

Founded in 1942 as a small dress manufacturer, Algo Group Inc. has grown to become Canada’s leading apparel company. The company’s 16 divisions have a presence in four segments of the apparel industry: ladieswear, children’s wear, sportswear, and textiles. Algo’s product lines are oriented towards the mid-market consumer and are made up of such well-known licenses as Bugle Boy, Ocean Pacific, and Hank Player as well as the company’s own brands, including S.O.S., Badge, Green Jeans, and Robin. The company’s textile division, operating under the banner of the Hamil Group, is a leading international textile converter that caters to a broad client base including moderate to designer sportswear, activewear, weekend wear, children’s wear, and lingerie. Operated out of divisional centers in Toronto, Montreal, Vancouver, New York, Los Angeles, Dallas, Osaka, and Seoul, Algo derives about 40 percent of its C$200 million in sales from outside of Canada.

Company Origins in the 1940s

Algo Group Inc. was founded in 1942 by two brothers, Joseph and Ben Schaffer, whose family had emigrated from Poland to Montreal, Canada, in the 1930s when the brothers were children. By the 1940s Montreal had become the center of a burgeoning Canadian fashion industry and, searching for a business venture, the young Schaffer brothers rented a small office on Peel Street in downtown Montreal and began to manufacture ladies’ dresses designed to sell for under C$10. The Schaffer brothers’ business prospered, and soon they were able to move the company’s headquarters to Chabanel Street in the heart of Montreal’s famous garment district.

Over the next two decades, Algo became a leading Canadian manufacturer of moderate to higher-priced ladies’ dresses and related apparel. Algo’s dresses, produced by the company’s Algo and Lori Ann divisions, appeared at major social occasions across Canada. As the emphasis in the fashion industry moved towards less formal apparel, Algo entered the ladies’ sportswear and casual wear segments with the opening of a number of new divisions.

From the start, Algo’s program of expansion was characterized by a unique approach to company management. Convinced that a good work ethic springs from a commitment to the company, the Schaffers hand-picked division managers and then gave them up to a 30 percent share in the subsidiary’s ownership. These highly motivated management teams were granted a great deal of autonomy in terms of production, sales, marketing, and shipping, with the Algo Group working as an umbrella company to provide accounting, administration, and other corporate management services. Reflecting on this approach to expansion in a 1989 interview with Bobbin, Joe Schaffer commented, “It’s true I put in all the money, but they give me 70 percent. I don’t give them 30 percent... I am able to have all these companies, whereas by myself I could run only one—at best, two. I didn’t give; I got.”

In addition to diversifying its product line through the careful building of subsidiaries, Algo minimized the risks inherent in the volatile fashion industry by contracting out most of the company’s manufacturing, thereby reducing the need for huge investments in plants and inventory. In this way, Algo became essentially a fashion supplier, with design teams to capitalize on fashion trends but without the expense or risks of production.

Expansion and an IPO in the 1970s and 1980s

As Algo entered the last quarter of the century, the company had become one of the leading suppliers of ladies’ dresses in Canada, but with annual sales of only about C$10 million the company was poised for further growth. According to company lore it was Joseph Schaffer’s son-in-law, Elliot Lifson, who was in large part responsible for the program of expansion undertaken by Algo Group through the 1970s and 1980s. Lifson, a practicing attorney, had decided to go back to school to earn an M.B.A. and chose Algo as the subject of his master’s thesis. After intensive study of the company’s operations, Lifson’s thesis recommended that Algo should “expand and grow,” advice that was taken seriously by the Schaffer brothers. Over the following decade Algo Group made a major thrust into the U.S. and international markets, as well as further diversifying its product line.

One major new venture for the Algo Group during these years began as a temporary solution to a supply problem. Hamil Textiles Ltd., the company’s main textile company, was founded as a clearing house for the excess fabric that Algo companies had bought but that, for one reason or another, they were unable to use. “We thought it would be most advisable for us to open up an area where we could sell our mistakes, to retailers and to manufacturers, and get as close to cost and better if we could. This proved so successful that it became a business and I was left without a cellar of mistakes,” Schaffer explained to Bobbin.

Although in the early days of Algo’s operations manufacturing was concentrated in the Montreal area, as Canadian labor costs escalated production was moved increasingly to Asia. In the mid-1970s the company opened an office in Hong-Kong to oversee Asian supply, a demanding task because of the system of import quotas imposed by the Canadian government. “If one supplier’s quota is used up, it’s our job to find another,” Allan Zeeman, Algo’s chief operating officer and head of the Asian office, told the Globe and Mail in 1987. By the mid-1980s Asian imports accounted for a full 60 percent of Algo’s North American sales.

By 1986 Algo’s expansion into men’s, women’s, and children’s sportswear, as well as a gradual penetration into the U.S. market, saw profits reach C$11.5 million on sales of C$190 million. With 13 subsidiaries and 20 percent of sales derived from the United States, the company prepared itself for a major push towards new levels of growth. The first step in this new phase of expansion was an IPO of two million shares on the Montreal and Toronto stock exchanges which netted C$17 million. About C$4 million of this new capital was to be dedicated to expand U.S. sales and C$9 million was targeted to the development of a new line of children’s wear in Canada. The ever-optimistic Joe Schaffer predicted that by 1990 total sales volume would be divided equally between the United States and Canada and might even reach the C$1 billion mark.

Schaffer’s optimism appeared well-founded when, in 1987, sales for Algo’s first major entry into the U.S. market, Tangiers International, increased by over 30 percent in a single year. The Algo subsidiary, which marketed a line of women’s sportswear, had been spun off from the company’s Canadian Tangerine division two years earlier in order to take the division’s Tangerine and Tangiers sportswear line into the United States. In its first week of operation the subsidiary signed up seven of the leading department stores in the New York area, including Macy’s, Blooming-dale’s, Lord and Taylor, and Gimbel’s. Over the next two years the Tangiers line swept through the American market, capturing sales in all 50 states by 1987. Tangiers International opened nine sales offices across the country, establishing an apparent U.S. beachhead for parent Algo. In spite of the initial dramatic success of Tangiers International, the volatility of the fashion industry and the recession of the late 1980s caused an equally dramatic drop-off in sales, and Algo was forced to retract its U.S. presence. By 1990 U.S. sales had shrunk to only about 15 percent of total revenues, and losses from the company’s U.S. operations mounted to over C$1 million. “We thought we had discovered America,” Joe Schaffer told Bobbin in 1989. “[But] we moved too quickly and we had to cut back.”

In addition to Algo’s U.S. thrust, the company sought to expand in the 1980s through a program of acquisitions. In 1988 Algo Group made a significant break with its traditional role as a wholesaler with the purchase of two struggling retail chains; One Plus One, a women’s specialty chain carrying higher-priced fashion merchandise, and La Vie En Rose, which sold upscale lingerie. The chains, which had been owned by Harry and Rosemary Kaner, had combined sales of C$25 million in 1987, but both had been forced to file for bankruptcy protection after overexpanding during the tough retail environment of the late 1980s.

Company Perspectives

Algo Group’s mission is to be a recognized leader in the fashion industry in Canada, the United States and Europe. We will strive to create strategic alliances with our customers and to consistently meet their expectations with respect to product design, value, and timely and responsive service and support. We will foster an environment that encourages teamwork among our employees and supports their creativity. We will provide them with the training and technology that enable them to build challenging and rewarding careers. Consistent with this mission, we will conduct ourselves at all times in a fair and ethical manner with our employees, customers, suppliers and the community at large. We believe that the successful pursuit of these goals will enable Algo Group to achieve growth, profitability and above average returns for our shareholders.

In fulfillment of the firm’s objective to expand its presence in the children’s apparel segment, Algo made the largest acquisition in its history with the 1988 purchase of Robin International Inc. for about C$30 million. Robin International, itself a 59-year-old company, specialized in children’s outerwear but also marketed a line of children’s sportswear. In accord with Schaffer’s policy of maintaining strong, independent management teams for his subsidiaries, Robin International’s senior management were retained after the acquisition. The new subsidiary was expected to add C$65 million in sales to Algo’s total revenues.

Losses and Retrenchment in the 1990s

As the Algo Group entered the 1990s, the company and its subsidiaries appeared to have weathered the recession of the late 1980s. When other Canadian garment companies were struggling or folding, Algo’s sales had risen to a record C$305 million in 1989, and income had remained steady at about C$7 million. The Canadian retail industry, however, trailed the rest of the economy in the financial recovery, and in the early 1990s retail bankruptcies forced Algo to write off millions in bad debt. While sales stayed relatively steady, profits dropped to only C$1.5 million in 1990 and then shrunk to an almost nonexistent C$418,000 and C$74,000 in 1991 and 1992, respectively.

Algo responded to the problems in the Canadian apparel industry, which had been exacerbated by the new Canadian Goods and Services Tax (GST) and cross-border shopping, by attempting to expand their U.S. and international sales. In 1992 the company purchased two divisions of the California-based Roam Corp., which were expected to add about C$20 million to Algo’s U.S. sales. The company’s U.S. business became one of the few bright spots in Algo’s financial picture as sales rebounded to about 30 percent of the company’s total, and U.S. operations returned to profitability in 1993. The company’s Tangerine division also began an intensive marketing campaign in Russia, opening a small office in Moscow that was expected to bring in about C$5 million in sales in 1993.

In spite of small gains in the U.S. and international markets, Algo’s financial position worsened as the Canadian retail industry continued to undergo a major restructuring into the mid-1990s. To make matters worse for Algo, the Montreal garment industry, once the center of the fashion business in Canada, had been slowly deteriorating as uncertainty about the political future of Quebec drove business out of the city to the more stable centers of Toronto and Vancouver. In 1993 the company closed eight of its 29 divisions in an attempt to stem growing losses, but in 1994 Algo nevertheless suffered a disastrous net loss of C$11 million on sales of C$280 million, the first red ink in the company’s 53-year history.

After recording a second straight loss in 1995, and faced with shareholder grumbling, Algo Group began to make a serious effort to revitalize the management of the half-century-old firm. One of the company’s two retail chains, One Plus One Fashions, was closed after filing for bankruptcy, and the other, La Vie en Rose, was sold, ending Algo’s venture into retail trade. New directors were also appointed, and, most significantly, in 1996 75-year-old company founder Joseph Schaffer stepped down as Algo president, being replaced by longtime administrator Jack Wiltzer. Along with Ben Schaffer’s death a few months earlier, Joe Schaffer’s resignation ended an era for the Montreal company.

Nearing the end of the century, the pared-down company was once again in the black with a modest net income of C$2 million on sales of C$202 million in fiscal 1996. With only 16 divisions and 500 employees, as compared to the 1,300 people that worked for the company’s 29 divisions in the late 1980s, Algo prepared to regroup and to reassess the Canadian and world fashion markets. A number of “shop in shop” boutiques, selling the company’s Lori Ann and JS Collections lines, were opened in The Bay stores. The Bay was one of Canada’s oldest and largest department store chains and the new boutiques were seen as an attempt to rebuild consumer interest in shopping at these traditional outlets. If successful, the company planned to extend the in-store boutique concept to the U.S. department store chains with which it did business. In a 1997 speech to shareholders, Algo President Jack Wiltzer emphasized that the company’s new approach to marketing was now to be “narrow in product, wide in market.” By narrowing its focus to women’s apparel, sportswear, children’s outerwear, and textiles, Algo hoped to rebuild its reputation as one of the leaders of the Canadian fashion industry.

Principal Subsidiaries

Algo Industries Ltd.; Robin International Ltd.; Hamil Textiles Ltd.; Jeric Fashions Group Inc.; Take Two Textiles Inc.; Hamil America Inc.; Hamil Textiles (U.S.A); J.S. Group USA, Ltd.; Robin International (U.S.A.) Inc.