Cygne Designs, Inc.
Cygne Designs, Inc.
Sales: $254.3 million (1996)
Stock Exchanges: NASDAQ
Ticker Symbol: CYDS
SICs: 5137 Women’s/Children’s Clothing; 5136 Men’s/ Boys’ Clothing
Cygne Designs, Inc. is a private label manufacturer of women’s apparel, including woven and knit career and casual apparel. A private label merchandiser and manufacturer, Cygne Designs, Inc. produces apparel based on retailer’s orders, which are then sold with the retailer’s own label. Cygne does not have a label of its own. In recent years, Cygne’s single biggest customer has been The Limited, Inc., of which sales to the company account for a majority of Cygne’s annual sales figures. Despite a long-established relationship with this key customer, Cygne does not have a long-term contract with any of its customers. As a private label manufacturer, filling high volume orders from a small number of customers, Cygne is dependent on its key customers and is sensitive to changes in the highly competitive and dynamic women’s apparel market. Recently, retailers are moving away from ordering private label products from outside vendors and sourcing those products in-house. Due to the fact that Cygne is not involved in contract arrangements with its customers, this trend has led to the cessation of Cygne’s supply of apparel to a few key customers in recent years.
The Early Years
Cygne Designs Ltd. was founded by clothing designer Irving Benson in 1975. With its beginnings as an importer of designer clothes from Europe, the company eventually began manufacturing its own silk blouses and skirts. By the early 1980s, Cygne had built a solid business designing private lines for companies like AnnTaylor, The Limited, and Talbots. In October 1984, Mast Holdings, a wholly owned subsidiary of The Limited, Inc., acquired 80 percent of Cygne; four years later, however, The Limited began selling off all companies that did not produce exclusively for its chains. Unable to buy Cygne back on his own, Benson approached an acquaintance named Bernard Manuel, who was then working for the French investment bank Amvent Inc. In March 1988, Amvent organized a leveraged buyout of Cygne, with Amvent and its investors receiving 71 percent of the company and Benson receiving the other 29 percent.
Despite the return of the company’s control to its founder, in 1989 Cygne was mired in serious quality and delivery problems. The company had sales of $30 million, losses of $6 million, and was facing bankruptcy. The Amvent-led investment group sold its interest. Manuel, however, decided to remain with Cygne. In exchange for a 33 percent interest in the firm, he took over as CEO, with Irving Benson as president and chief designer. Under Manuel, Cygne was reorganized. “The company we acquired was not a complete company,” Manuel told Forbes in November 1994. “It had great design capabilities and good sales, but, buried in The Limited group, it had no abilities in systems, sourcing and manufacturing. It could sell very well, but it couldn’t deliver.” Manuel had to re-establish the infrastructure once provided by The Limited, while at the same time reducing the number of Cygne’s foreign production facilities and placing Cygne personnel there to monitor quality.
A Turn For the Better in the 1990s
Cygne’s business was booming between 1990 and 1993. In that four year period, Manuel told Forbes, Cygne “never solicited a single customer.” The clients came to Cygne, including The Limited, Victoria’s Secret Catalogue, and Compagnie Internationale Express. Business with AnnTaylor Stores, in particular, flourished. In June 1992, the two companies formed a joint venture—CAT—to produce casual wear exclusively for AnnTaylor stores, with Cygne owning 60 percent and AnnTaylor the other 40 percent. In April 1993, CAT actually became a subsidiary of Cygne, who owned 60 percent of the operation with AnnTaylor owning the remaining 40 percent interest.
Sales in 1993 rose 77 percent, from $70.4 million to $124.7 million. Two customers accounted for the lion’s share of those sales—AnnTaylor, and The Limited Stores and Express. At the beginning of August 1993, in an effort to repay outstanding debts, the company made an initial public offering of 2.4 million shares. Helped by a previous commitment from The Limited to purchase a 10.2 percent interest, the offering raised approximately $21.4 million. A month later, Cygne reported a sales increase of 142 percent for the first half of 1993, from $39.8 million to $96.6 million, and sales and profits continued to climb for the remainder of the year.
Cygne made a number of acquisitions in 1993. It purchased JMB Internacionale S.A., a company that supervised the manufacture of apparel in Guatemala. Cygne also paid $500,000 and 150,000 shares of Cygne common stock for T. Wear Company S.r.l. and M.T.G.I. Textile Manufacturers Group (Israel), both of which were women’s apparel companies. In September 1993, Cygne announced plans to issue 2 million new shares of its stock in order to purchase Fenn, Wright & Manson, a private sportswear manufacturer. Irving Benson told Women’s Wear Daily, “The combined company will offer well-balanced strength in all categories of woven and knit casual and career sportswear for women.” Fenn, Wright & Manson’s casual sportswear, sweaters and woven silk products were expected to complement Cygne’s woven career sportswear lines, while also introducing a brand new element. The acquisition was completed on April 6, 1994. In addition to the stock, Cygne paid cash for Fenn, Wright & Manson. The total value of the purchase was estimated at $44 million. Fenn, Wright & Manson’s CEO became a vice-chairman and chief operating officer at Cygne.
Another public stock offering was mounted by Cygne in June 1994. Two million new shares were issued, and raised $34 million, with $6 million of the proceeds slated to repay debt incurred through the acquisition of Fenn, Wright & Manson. The results of the offering highlighted Cygne’s successful year—ten months earlier its stock had sold for $10 a share, but by June 1994 it went for $18.25 a share.
Expansion Efforts and Trying Times in the Mid-1990s
Cygne’s mid-year figures in 1994 seemed to indicate a healthy company. New customers had helped to more than double sales during the first six months of the year, from $96.6 million to $198.8 million. CEO Manuel stated that Cygne’s successful integration of Fenn, Wright & Manson had also helped contribute to the positive results. In order to establish itself more firmly, Cygne announced its intent to reduce its dependence on AnnTaylor and The Limited, which together accounted for 83 percent of company sales. This decision reflected the company’s understanding of the problems that would be posed if Cygne lost either company as a customer.
Branching out, the company signed contracts with American Eagle Outfitters and Casual Corners. The two contracts combined were expected to be worth $60 million a year, and Manuel was also working on placing Cygne designs in mass outlets like Kmart and Target.
Cygne continued its wave of acquisitions in late 1994, purchasing GJM International Ltd. for a total estimated at about $13.3 million. Like Cygne, the Hong Kong-based GJM was a private label apparel manufacturer whose largest customer, Victoria’s Secret Stores, accounted for 67 percent of its $100 million in sales the previous year. In purchasing the company, Cygne hoped to broaden its product lines through the addition of intimate apparel. As part of a fifteen year non-compete agreement, Cygne paid $3 million to Glynn Manson, GJM’s chairman and CEO. Manson had helped found Fenn, Wright & Manson, the company Cygne had acquired the previous spring. Under the terms of the deal, Manson retained his positions at GJM.
It was around this time that Cygne’s success story began to unravel. After it was announced that third quarter earnings were expected to fall well below earlier estimates, Cygne stock plunged to a 52 week low of $14; bad expectations were confirmed by figures released in December. The company blamed a variety of factors. Depressed retail sales had led some customers to cancel orders. Suppliers had postponed deliveries, as well as delivering substandard knitwear which Cygne’s customers had often refused to accept. Despite the disappointing earnings, sales were up significantly from the same quarter the previous year, and the company had grown in 1994 as a whole. Women’s Wear Daily reported that “analysts were particularly impressed with the strength of Cygne’s core apparel business, driven by strong sales of career and casual wear to AnnTaylor,” and they predicted increases of 50 percent or more in 1995. The lower-priced AnnTaylor Lofty line Cygne was working on was considered to be particularly promising. Manuel told the publication “Despite the current soft retail environment, which we expect to continue into the first half of 1995, we feel that Cygne Designs is uniquely positioned to take advantage of growth opportunities, particularly with new customers.”
The manufacture of private label apparel is characterized by high volume sales to a small number of customers at competitive prices. Although private label gross margins are lower than in the brand name apparel industry, marketing expenses and collection and markdown costs are typically commensurably lower, and inventory turns are generally higher. Inventory risks are also reduced because the purchasing of fabric and other supplies begins only after purchasing commitments have been obtained from customers. The Company believes that retailers, including customers of the Company, are increasingly sourcing private label products themselves rather than utilizing outside vendors like the Company.
The value of Cygne shares continued to drop, however, and by spring the downward spiral had steepened. Sales fell to levels that were 10 percent under earlier Wall Street projections. At the end of April 1995, Cygne stock reached an all-time low of $6¼, and in June the company reported first quarter losses of $4.7 million. The company called the decline “a temporary stumble” and blamed a slump affecting the entire women’s apparel market. Cygne also admitted that there had been more problems integrating its Fenn, Wright & Manson unit than were initially apparent. Finally, the company had to write off a bad debt of approximately $1.1 million “from a customer which is experiencing financial difficulties,” as reported to Women’s Wear Daily.
Some analysts believed Cygne’s problems began with its two large acquisitions the previous year. The company announced plans to lay off a number of Fenn, Wright & Manson employees, and told its shareholders at its June meeting that it was implementing an austerity program.
The problems did not go away, however and losses continued to plague the company. In the first half of 1995 Cygne had $9.7 million in losses compared to $3.6 million in profit during the same period the previous year. By the end of the year, the value of its stock had dropped once again, this time to $4⅛ In November, as a result of a $53 million deficit, The Hong Kong & Shanghai Bank suspended the company’s line of credit. With the possibility looming that the bank could call in its outstanding loans, Cygne began negotiations for a new payment schedule and the restoration of credit.
Challenges at the Turn of the Century and Beyond
In the wake of its rapidly compounding financial problems, Cygne was hit with two law suits in the latter half of 1995, both of which maintained that the company had lied about its financial situation during the preceding year. The first was a suit for $5.6 million brought by a former Cygne vice-president. Richard M. Kramer had been recruited by Cygne from The Leslie Fay Co., but was fired just three months after he joined the company. Kramer alleged that Cygne officials had failed to make him aware of the fact that Cygne was in serious financial trouble. Kramer also charged that he had been persuaded to accept much of his compensation in the form of stock options, although Cygne officials were aware that the value of the stock would “drop significantly” as soon as the poor upcoming quarterly results were made public.
Late that year, after the company’s stock had dropped to a dismal $1¼, a Cygne shareholders group brought suit against the company, Irving Benson, Bernard Manuel, company accountants, and the investment companies that underwrote the Fenn, Wright & Manson acquisition. The suit, according to The Wall Street Journal, charged Cygne with “disseminating false and misleading information about Cygne’s business, finances and prospects that damaged purchasers of Cygne stock” when the company purchased Fenn, Wright & Manson. The suit also maintained that Cygne was “riddled with huge losses, massive operational and management problems and is threatened with bankruptcy.” Manuel maintained that the company would not be filing for bankruptcy, and said that in order to satisfy its bank the company was considering the sale of various assets.
The first item put on the Cygne sales block was GJM, the company’s sleepwear division. In February 1996, the Warnaco Group paid Cygne $12.5 million in cash and assumed all liabilities connected with GJM. In addition to GJM’s other assets, Warnaco acquired its private label accounts, including Victoria’s Secret. Cygne took a loss of $33 million on the sale.
In September 1996 the company completed a major deal with AnnTaylor Stores Corp. Cygne gave up its 60 percent interest in CAT, the joint venture that the two companies had established in 1992. It also sold off its AnnTaylor woven division. Cygne received $9.76 million in cash and 2.35 million shares of AnnTaylor common stock, a deal estimated to be worth $50 million. The sale put AnnTaylor Stores, also hurt by the overall decline in the women’s apparel market, on firmer footing by reducing their dependence on outside sourcing—in particular, it reduced their dependence on the troubled Cygne. For Cygne, the deal, once completed, meant the restoration of its credit lines. On the other hand, giving up the two divisions meant giving up its largest customer. The previous year, AnnTaylor had accounted for 54 percent of the company’s sales.
Between October 1996 and January 1997, the company sold all of its AnnTaylor stock to pay its $8.9 million in outstanding debt. Incidental to the sale, both Irving Benson and Bernard Manuel received three-year $225,000 consulting contracts with AnnTaylor which went into effect if their employment with Cygne was for any reason terminated.
Around the same time, Cygne signed two five-year contracts with Kenzo, a French manufacturer that hoped to break into the U.S. market. Under the deal, Cygne was to design for the 1997–1998 Kenzo Studio bridge line and the Kenzo Jeans collection. The deal marked the first major new customer for Cygne in nearly a year, and the company viewed it as an upturn. Manuel stated his belief that the company had weathered the crisis; he also made clear Cygne’s intent to move slowly in looking for new customers. Cygne’s primary focus, he said, would be to maintain the private label business and attempt to expand it.
In November 1996, Cygne’s founder, Irving Benson, resigned suddenly from the company. Without offering any reasons to the press, he announced that he planned to form a consulting company which would continue to work with Cygne on various projects. In addition, Benson entered into a consultant relationship with AnnTaylor.
In January 1997, Cygne shareholders were awarded $5.75 million in damages when federal court in New York City found the company guilty of security violations. Cygne said afterwards it would pay $2.1 million of the settlement; insurance and other litigants paid the remainder. When the settlement was reached Cygne stock had dropped to 1 3/16 on the over the counter market.
Meanwhile, Cygne losses continued. In the spring of 1997, the company announced that it expected a net loss for the fiscal year. The extent of the loss, Cygne said, depended on the start-up costs entailed by its Kenzo contracts. In June, however, that deal fell through altogether when the two companies came to a mutual agreement to terminate the arrangement. Kenzo stressed that there were no problems with design or production; the company had simply decided that in order to gain a foothold in the U.S. market, it would have to use top-level, not mid-level, lines. For Cygne, the cancellation was disastrous. The company was left with a single major customer, The Limited, and Cygne’s sales to them had fallen $7 million between 1996 and 1997. By the end of June, Cygne stock had plummeted to $⅜.
In an attempt to cut costs further, Cygne discontinued its design studio in New York City during the 1997 fiscal year. It also moved its corporate offices to a significantly smaller office space. In April 1998 the NASDAQ National Market notified Cygne that its stock was scheduled for delisting. NASDAQ requires that shares maintain a minimum price of at least $ 1 a share, a requirement Cygne had not met for the better part of a year. The stock was officially delisted by NASDAQ on June 6, 1998.
The company’s disastrous past few years, coupled with expenses actually resulting from attempts to downsize in order to deal with the crisis, led to a net loss of $14.5 million in 1997. Furthermore, the company was forecasting another net loss for 1998. As the decade came to a close, Cygne’s future was anything but steady. Its ability to stay afloat would depend upon continued orders from The Limited, Inc., the attraction of new customers, and the success of the company’s reorganization.
Agins, Teri and Laura Bird, “Cygne Designs Accused of Fraud in Shareholder Suit,” Wall Street Journal, December 21, 1995.
“AnnTaylor alters pact with Cygne,” Women’s Wear Daily, August 29, 1996.
“Benson steps down as Cygne head,” Women’s Wear Daily, December 2, 1996.
“Companies to Watch: Cygne Designs,” Fortune, January 24, 1994.
“Cygne buys GJM for cash plus shares,” Women’s Wear Daily, October, 11, 1994.
“Cygne inks deal to buy Fenn Wright & Manson,” Daily News Record, December 14, 1993.
“Cygne raises $34.07M in secondary offering,” Women’s Wear Daily, June 10, 1994.
“Cygne takes a $33M loss in deal with Warnaco,” Women’s Wear Daily, February 13, 1996.
“Cygne’s initial public offering raises $21.5M,” Women’s Wear Daily, August 3, 1993.
Feldman, Amy, “Ugly Duckling into Swan,” Forbes, November 7, 1994, p. 170.
“FTC clears AnnTaylor to buy sourcing operation from Cygne,” Women’s Wear Daily, July 10, 1996.
Ryan, Thomas J., “Cygne to buy Hong Kong intimate apparel maker,” Women’s Wear Daily, August 5, 1994.
Seckler, Valerie, “AnnTaylor to buy Cygne out of CAT,” Women’s Wear Daily, April 9, 1996.
Siegel, Jeff, “Former exec sues Cygne for $5.6M,” Women’s Wear Daily, August 31, 1995.
Weisman, Katherine, “Kenzo inks deal with Cygne for jeans, bridge,” Women’s Wear Daily, September 17, 1996.