Happy Kids Inc.

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Happy Kids Inc.

100 West 33rd Street
Suite 1100
New York, New York 10001-2916
U.S.A.
(212) 695-1151
(877) 832-2118
Fax: (212) 736-0397

Public Company
Incorporated: 1988 as O’Boy Inc.
Employees: 172
Sales: $154.6 million (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: HKID
NAIC: 42232 Men’s & Boys’ Clothing & Furnishings Wholesalers; 42233 Women’s, Children’s & Infants’ Clothing & Accessories Wholesalers

Happy Kids Inc. is a custom designer and marketer of licensed and branded children’s apparel. Its products include knit tops and bottoms, overalls, shortalls, coveralls, and swimwear (collectively, “playwear”) for newborns, infants, toddlers, boys, and girls. Major licensees in 1999 included Nickelodeon’s Rugrats cartoon series, AND 1, B.U.M. Equipment, the four major professional sports leagues, and the World Wrestling Federation. The company, based in New York City’s garment district, also designs and delivers private-label branded playwear for leading retailers, including the Sesame Street line for Kmart Corporation.

O’Boy: 1988–97

Jack Benun had managed a family apparel manufacturing business before founding a predecessor of Happy Kids in 1979. Other business entities were subsequently formed, all under the common ownership of Benun, his son Mark, and Isaac Levy, who incorporated O’Boy Inc. in 1988. In 1994 O’Boy introduced Ocean Pacific, its own branded line of boys’ bathing suits and clothing. Prior to and including much of 1995, O’Boy’s operating strategy primarily focused on developing, manufacturing, and marketing its own house brands and often concentrated on enhancing sales volume rather than a combination of sales volume and gross margin. This policy, the company came to believe, was a mistake: after earning net income of $703,000 on sales of $74.5 million in 1994, it lost $1.5 million on sales of $79.8 million in 1995. (Net income figures through 1998 reflect the company’s status, prior to April 1998, as an S corporation, with shareholders, rather than the company, paying federal and state income tax on profits.)

To leverage its customer relationship, its popular licenses and brand names, and its reputation for quality products and reliable delivery, O’Boy then initiated a new sales strategy, by which customers ordered specific quantities of goods on a fixed-price basis three to nine months in advance of a selling season. By limiting its production of goods to firm orders in hand, O’Boy reduced the inventory risk typically faced by companies in the apparel industry. The company also declined to accept an order unless it met or exceeded O’Boy’s gross margin goals.

In 1996 O’Boy began focusing on the development of a diversified portfolio of popular, established, and well-recognized licensed properties and branded private-label arrangements. As a consequence, the company shifted its product mix from lower-profit-margin house brands to higher-margin licensed and private-label apparel. Its focus on playwear products minimized the company’s vulnerability to shifting fashions, since the shorts, T-shirts, sweatsuits, and other playwear products O’Boy designed and marketed were the kind of basic day-to-day items that children outgrow long before they go out of style.

O’Boy began creating Sesame Street private-label apparel for Kmart and marketing to specialty retail sporting goods stores such as Champs, FootAction, and The Sports Authority in 1997. It also acquired the licenses to AC A Joe, E.N.U.F. Internationale, and Warner Brothers’ Scooby Doo that year. Net sales rose to $90.7 million in 1996 and $106.7 million in 1997. Net income came to $1.5 million in 1996 and $2.7 million in 1997.

Public Company: 1998–99

O’Boy changed its name to Happy Kids in December 1997. Happy Kids made its initial public offering in April 1998, selling about one-quarter of its common stock at $10 a share. The net proceeds of $22.3 million were allotted to pay debt and to repay $2 million in promissory notes to stockholders of the prior private company. These stockholders also received almost 4.3 million shares in the new public company in exchange for their holdings in the separate business entities that comprised the prior Happy Kids and that then became wholly owned subsidiaries of the company.

In 1998 the Licensing Industry Manufacturers Association named Happy Kids licensee of the year in the soft-goods category for its successful marketing of children’s clothing under the Rugrats license from Nickelodeon. During the year Happy Kids expanded its portfolio of licensed brands and characters by adding Jim Henson’s Kermit the Frog and Friends, World Wrestling Federation, and Arthur, the popular aardvark character that had sold more than 24 million books and was featured in the top-rated preschool program on television. At the end of the year Happy Kids secured two new licenses: for the popular toddler television show “Teletubbies” and for Mecca, a popular boys’ brand. Happy Kids was making royalty payments ranging between six and 12 percent of net sales.

While about half of Happy Kids’ sales was coming from licensed products, the other half was from supplying retailers with private-label brands. These were active wear product lines Sesame Street for Kmart, Canyon River Blues for Sears, and New Legends for Kids R Us, and infantwear product lines First Moments for Kohl’s and Lullaby Club for Target. In March 1998 Kmart named Happy Kids “vendor of the year” for the Sesame Street private-label program, which was introduced in 1997.

Happy Kids announced in March 1999 that it had signed a three-year licensing agreement with Mudd, a New York City-based juniors’ and children’s contemporary sportswear company, to design, distribute, and market all of its girls’, infants’, and toddlers’ wear. The new product lines were expected to appear in department stores before the end of the year.

In April 1999 Happy Kids acquired D. Glasgow & Son, a leading designer and manufacturer of children’s apparel, for cash and stock valued at $4.9 million, plus the purchase of $2.9 million in inventory. Glasgow licensees included the National Football League, National Basketball Association, National Hockey League, Major League Baseball, and certain Warner Brothers’ properties, including Looney Tunes, Looney Tunes Girls, Scooby Doo, and Saban’s Power Rangers. Andy Glasgow, president of the acquired company, joined Happy Kids as president of a new Glasgow division.

Happy Kids posted impressive results in 1998, raising net sales almost 50 percent, to $154.6 million, and increasing its net income more than threefold, to $9.6 million. The company’s operating margin rose from 7.9 percent to 11.9 percent. Its share price was not rising, however, which was a source of disappointment for Kern Capital Management and other large investors in the company. Potential stock investors remained skeptical since character-based apparel can have a short shelf life. (A planned Godzilla line apparently foundered because the 1998 film reviving this character did not succeed at the box office.)

Happy Kids: Present and Future

Happy Kids’ play wear was being designed by more than 50 in-house designers and graphic artists organized in teams dedicated to each of the company’s licensed properties and private-label programs. Each team was working closely with licensors, customers, and contract manufacturers, utilizing state-of-the-art CAD systems to design coordinated products featuring textured fabrications and detailed graphics. Happy Kids insisted upon cutting its own patterns and making product samples in-house before assigning a job to a contract manufacturer. To reduce costs, sophisticated company computer systems laid out patterns in a way that maximized fabric yields. Happy Kids also tested manufactured clothes to make sure they looked and fit right.

Happy Kids maintained a sales and marketing staff of 23 people, including its senior management, at the end of 1998. Account teams organized by the company were each led by a sales executive who reported directly to senior management and was responsible for day-to-day customer relationship management and for supervising and monitoring the sales staff, which was being compensated on a salary-plus-commission basis. The sales and marketing staff worked closely with the company’s designers and graphic artists throughout the design and production process.

Happy Kids’ customers often launched a new product line associated with a new license or private-label relationship in a limited number of stores. If the product proved successful, the company’s customers often marketed the product line throughout their retail chains or in a significantly larger number of stores. Happy Kids’ design team and sales staff were working closely with its customers to monitor, review, and analyze product launches.

Company Perspectives:

The Company is committed to growing through a strategy of expanding its portfolio of licenses and brands, increasing sales to new and existing customers, and building on its reputation for quality products and superior customer service.

The company’s products were being manufactured by more than 75 contract manufacturers. Some 86 percent of its 1998 production came from the Far East, with manufacturers in Thailand accounting for 43 percent and those in Hong Kong for 29 percent. The rest of the production was domestic. Happy Kids was leasing a 130,000-square-foot warehouse facility in New Brunswick, New Jersey, and space in a Long Beach, California, public facility. It maintained showrooms at its corporate headquarters in Manhattan’s garment district and in Bentonville, Arkansas, world headquarters for Wal-Mart Stores, Inc.

Happy Kids’ sales were highly dependent in 1998 on a few mass-market retailers, with Kmart accounting for 22 percent, Target for 14 percent, and Wal-Mart for 11 percent of net sales. Kids R Us and Price/Costco, as well as Kmart, were the major customers in 1997. The company also was selling to department store chains such as Dayton Hudson, Dillards, Federated Department Stores, and J.C. Penney, mid-tier distributors such as Sears and Kohl’s, and specialty retailers such as Champs, Foot Action, and Foot Locker. In terms of specific product lines, Rugrats accounted for 20 percent of net sales in 1998; Sesame Street for 18 percent; and AND 1 and B.U.M. Equipment for 14 percent each.

The product line at the end of 1998 consisted of the following: AND 1, basketball apparel for toddlers and boys; B.U.M. Equipment, lifestyle active wear for newborns, infants, toddlers, boys, and girls; Canyon River Blues, activewear for infants, toddlers, boys, and girls; E.N.U.F. Internationale, lifestyle activewear for boys and girls; First Moments, infantwear for newborns and infants; Lullaby Club, infantwear for newborns and infants; New Legends, activewear for toddlers and girls; Rugrats, character-based activewear for boys and girls; Sesame Street, character-based activewear for infants, toddlers, boys, and girls; Scooby Doo, character-based activewear for boys and girls; World Wrestling Federation, character-based apparel for boys.

Coming off a stellar performance in 1998, the company’s future remained incongruously uncertain as it approached the new millennium, for in July 1999 Happy Kids received an $11.50-a-share buyout offer from H.I.G. Capital L.L.C., a Miami-based private investment firm that proposed to take the company private.