Norton McNaughton, Inc.

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Norton McNaughton, Inc.

463 Seventh Avenue
New York, New York 10018
(212) 947-2960
Fax: (212) 643-9316

Public Company
Incorporated: 1993
Employees: 340 (1997)
Sales: $218.78 million (1997)
Stock Exchanges: NASDAQ
Ticker Symbol: NRTY
SICs: 5137 Womens/Childrens Clothing, Wholesale; 5099 Durable Goods, Not Elsewhere Classified; 2339 Womens/Misses Outerwear, Not Elsewhere Classified

Norton McNaughton, Inc. (Norton) designs and contracts for the manufacture of a broad line of brand-name, moderately priced womens career and casual clothing. The company also markets its productswhich include jackets, skirts, blouses, and sweatersas separates coordinated for styles, colors, and fabrics. All Norton products are fabricated from natural and synthetic fibers and blends; many are manufactured in petite and large sizes, in addition to the regular junior and miss sizes. The company sells its products nationwide in an estimated 7,000 individual stores operated by more than 350 department stores, national chains, mass merchants, specialty retailers, and discount stores. Nortons product labels include Norton McNaughton and Norton Studio, marketed by subsidiary Norton McNaughton of Squire, Inc.; Erika labels, marketed through subsidiary Miss Erika, Inc.; and Energie, Currants, and Jamie labels, marketed through subsidiary Jeri-Jo Knitwear, Inc. Approximately 57 percent of Nortons net sales come from its principal customers: The May Department Stores Company (Hechts, Foleys, Robinsons-May, Kaufmanns, Filenes, Famous Barr, and Meier & Frank); Federated Department Stores, Inc. (Richs, Burdines, Bon Marché, Sterns, and Macys); and J.C. Penney Company, Inc. By using domestic and foreign designers and contractors, Norton avoids significant capital expenditures and the fixed cost of managing a large production work force. The companys products generally retail for $20 to $80, averaging about $30 to $50.

The Early Years: 1981-93

Sanford Greenberg, who later served as Nortons president and chairman, worked for Squire Fashions Inc., a New York apparel firm, from 1960 to 1981. Then he joined forces with Jay Greenberg and Norton Sperling to buy out Squire; the company was renamed Norton McNaughton of Squire, Inc. The Norton McNaughton product lineNorton McNaughton, Norton McNaughton Petite, Maggie McNaughton, and Maggie McNaughton Petitewas introduced in 1981; it was marketed in miss, petite, and large sizes to department stores and national chains.

In July 1991 officers of the company formed NM Acquisition Corp. to acquire Norton McNaughton of Squire, Inc. in a leveraged buyout that led to the formation of Norton McNaughton, Inc., a holding company incorporated in January 1993. The companys net sales increased from $82.29 million in fiscal 1991 to $133.33 million in fiscal 1993, for a compound annual growth of 27.3 percent. During this period net income increased from $1.6 million to $3.33 million, for a compound annual growth rate of 44 percent.

The companys profitability in fiscal 1992 and 1993 was affected by the start-up and subsequent discontinuation of a dress division. Norton entered the dress market in early 1992 but soon realized that there were insufficient synergies in operating the dress and separates businesses. Norton discontinued the dress divisions operations during the second quarter of fiscal 1993 and introduced two new products, the Pant-her and Modiano product lines. The Pant-her linedesigned for women ranging in age from 40 to 70featured traditional related separates in miss, petite, and large sizes. Norton McNaughton of Squire, Inc., now a Norton subsidiary, contracted to sell Pant-her products exclusively to May Company stores; Norton and May Company agreed to terminate their agreement effective March 1, 1998 but, at that time, May Company continued to buy Nortons other product lines.

In fiscal 1993 Nortons reproductions of popular designer fashions were produced by domestic and foreign contractors, thereby allowing the company to avoid significant capital expenditures and the fixed cost of managing a large production work force. A substantial majority of Nortons products were made in the United States. Domestic contracts for manufacturing minimized excess inventory by giving the company maximum flexibility: Norton could defer production until reception of initial orders and then make a closer adjustment to buying trends. In fiscal 1993 the company engaged the services of approximately 30 sewing and knitting contractors in the United States and two overseas master contractors in the Dominican Republic and the Far East; Norton did not have any long-term supply agreements with any of its sewing or knitting contractors. The company, however, did have long-term agreements for the exclusive services of its domestic cutting contractor (Roni-Linda Productions, Inc.) and its domestic distribution contractor (Railroad Enterprises, Inc.) for initial terms ending June 30, 2000 (distribution) and June 30, 2001 (cutting), respectively.

The Middle Years: 1994-96

Norton went public in 1994 and was traded on Nasdaq under the symbol NRTY. In January 1994 the company broadened its Modiano product to a full line of related separates targeted to national and regional retail chains. The Modiano line had silhouettes similar to those of the Norton McNaughton line but sold at slightly lower prices in retail chains, such as Sears, Roebuck and Co. The company also established its own retail outlets, called Nortys, in which it sold end-of-stock, out-of-season, and other miscellaneous merchandise. Norton used these retail outlets to minimize sales to off-price retailers and as a means of liquidating excess inventory.

During 1995 and 1996 Norton presented four other product lines. The Lauren Alexandra line (June 1995), sold exclusively to Federated Department Stores, offered moderately priced career sportswear collections in miss and large sizes for women of ages 25-60. The denim-driven casual Danielle Paige line and D.P.S. product lines (August 1996) consisted of moderately priced weekend wear: jumpers, sport dresses, pants, shirts, skirts, shorts, jackets, and leggings. These lines were sold to department stores, chains, and mass merchants. The Norton Studio product line (January 1996), also sold in department stores, consisted of womens career and casual knitwear collections andas of Spring 1997included a large-sized product division.

As always, Nortons design philosophy was to reproduce popular designer fashions at moderate prices. The companys design team was responsible for the creation, development, and coordination of product lines that interpreted and mirrored existing fashion trends in womens better apparel. The team also sought to enhance consumer appeal by combining functional fabrics in creative looks and color schemes to encourage the coordination of outfitsand the purchase of more than one garment. Rather than buying all of its printed fabrics, Nortons design staff started with art work purchased from more than 25 art studios worldwide. Then, working with the art departments at mills and fabric suppliers, the company redesigned the art work by altering colors, backgrounds, graphics, and shapes to have the printed fabrics appeal to the fashion tastes of its target retail consumers.

During fiscal 1996 and fiscal 1995, approximately 57 percent and 71 percent, respectively, of Nortons products were manufactured in the United States, mostly in the New York City metropolitan area. In fiscal 1996 the company engaged the services of nearly 60 sewing and knitting contractors in the United States and nine overseas master contractors in the Dominican Republic, Central America, the Far East, the Middle East and Europe.

In fiscal 1995 net sales of $227.53 million reflected an increase of 34.9 percent from the net sales of $168.62 million in fiscal 1994. Nortons growth strategy, however, brought trouble. Foreign sourcing of productsas compared with domestic productionrequired a significant lead time ranging from four to eight months in the case of Dominican Republic and Central American sourced manufacturing and six to ten months in the case of Far Eastern, Middle Eastern, and European sourced manufacturing. Belated design changes forced postponements; shipments from abroad arrived late; competition increased for moderately priced womens apparel; and products entering the market too late in the fashion cycle were left on the shelves.

During fiscal 1996 approximately 43 percent of Nortons products were manufactured outside the United States. According to Yolanda Gaults story in the October 21, 1996 issue of Grains New York Business, at this time there was an industrywide malaise in moderate wear. Norton expanded too quickly in a weak market, introducing six divisions in under three years. Nortonknown for its nimble entrepreneurial culturelost its fashion sense. Consumers stayed away, leading to scads of markdowns, stinging losses and Wall Streets wrath. Compared with the net sales of fiscal 1995, net sales for fiscal 1996 decreased by $6.7 million, or 2.9 percent, to $220.82 million. Over and above the aforementioned problems, this drop also was attributable to a planned decrease in sales volume as Norton began to minimize the production of merchandise that it did not anticipate could be sold at a profit and, in response to competitive pressures from other moderately priced apparel wholesalers, granted customers a higher level of sales allowances.

Company Perspectives:

Nortons strategy is to increase sales to its existing customers, expand its distribution channels to include additional retailers and mass merchants, selectively expand existing product lines, and introduce new product lines in the womens segment. The company attempts to capitalize on what it believes to be a trend among its major retail accounts and to increase consumer demand for moderately priced womens clothing.

Adjustment to a Changing Market: 1997

In an effort to improve the profitability and position the company for future growth, in fiscal 1997 Norton implemented several strategic initiatives. These strategies included narrowing managements focus to the companys key divisionsNorton McNaughton and Norton Studio, making changes in pricing and product assortment, improving product sourcing, and significantly reducing overhead. Furthermore, to diversify its distribution channels, broaden its product offerings, increase its global product sourcing capability, and gain access to additional merchandising and managerial talent, the company adopted a special strategy for relevant acquisitions.

By early and timely attention to production planning, Norton aimed to offset the long lead time necessary for foreign sourced fabrics and manufacturing. For instance, the woven components of the Norton McNaughton and D.P.S. product lines were sourced primarily through import programs in China; a lead time of two to four months was needed to develop the required fabric. The time elapsed from the factorys fabric purchase commitment to the finished goods was generally an additional four to six months, thereby creating a total cycle time of six to ten months in the case of Far Eastern, Middle Eastern, African, and European sourced manufacturing. Norton also sourced a large portion of its woven products in countries of the Caribbean basin or in Mexico, making the most of favorable 807 customs regulations. In general, these regulations exempted from U.S. duties the products assembled abroad from U.S. components.

On May 6, 1997, Norton appointed Peter Boneparth, an investment banker whose previous firm had taken Norton public in 1994, as president and chief operating officer and director to succeed Norton Sterling, one of the companys co-founders. In a telephone interview reported by Anne DInnocenzio in the May 7, 1997 issue of Womens Wear Daily, Boneparth noted that he would use his expertise in acquisitions to play a hand in expanding Norton McNaughtons sales. Future acquisitions, he predicted, would catapult sales, which had been hovering at around $220 million, to $500 million within three to five years. We have $50 million in shareholders equity. The whole industry is consolidating. We want to be the consolidator, he said.

Boneparth began his tenure by following through on many of the moves the company had already begun making to get back on track. During the second quarter of fiscal 1997, Norton closed its 12 retail outlets because this division did not meet the companys profitability targets. A new merchandising strategy began to reduce excess inventory; excess merchandise could more cost-effectively be disposed of through discounters and other retailers. During the third quarter, Norton sold merchandise under its existing product lines to Sears and discontinued the Modiano product line, which had been produced exclusively for that company. A new pricing strategy, to be effective in August, was planned for the companys private-label line, which was priced 15 percent above the traditional labels and 25 percent below such upper-moderates as Halston and Emma James, Anne DInnocenzio wrote in the May 14,1997 issue of Womens Wear Daily. For instance, jackets were to retail from $68 to $72, compared with $80 to $90 in 1996.

On September 30, 1997, Norton acquired New York-based Miss Erika, Inc., a privately held firm established in 1968. Miss Erika manufactured moderately priced knit and woven separates, including knit tops and bottoms, sweaters, dresses and jackets, and more casual apparel, such as shorts, skirts, tank tops, and jumpers. The target customer was a middle-income, budgeted-minded but fashionable woman ranging in age from 15 to 50 years old. Miss Erikas merchandise was sold primarily under the Erika label and was distributed through regional chains, department stores, and specialty chains. Miss Erika contracted for the production of its garments through a network of purchasing agents located overseas. In addition to products sold under its brand names, Miss Erika worked with retail chains to develop product lines sold under the retailers private labels.

Upon completion of the Erika acquisition, Norton President Boneparth commented, This transaction highlights our strategy of acquiring companies that are accretive to earnings, have strong management teams in place, and broaden our existing channels of distribution, DInnocenzio reported in Norton McNaughtons New Mode in the May 14, 1997 issue of Womens Wear Daily. This acquisition reduced sales seasonality, since Miss Erikas revenues were weighted toward the first half of the year and Nortons sales were typically higher in the second half of the year. Norton also implemented other new distribution channels (for example, QVC and SAMs Warehouse Club) and began to sell to catalogue firms, such as Chadwicks.

In addition, in the fourth quarter, Norton discontinued the Lauren Alexandra private-label line produced for Federated Department Stores and the Pant-her private-label product line sold to The May Department Stores Company. To further streamline operations, Norton reduced its work force by close to 33 percent. Other cost-savings measures that were implemented included merchandising changes that enabled the company to produce fewer samples and reductions in executive compensation and ancillary expenses.

By October 30, the end of fiscal 1997, Nortons implementation of new strategies, discontinuation of unprofitable products and divisions, and acquisition of well-established, profitable Miss Erika boded well for the future but did not immediately show a profit. Net sales for the year decreased by one percent to $218.78 million, compared with net sales of $220.82 million in fiscal 1996. These decreases were offset in part by savings resulting from a significant downsizing of the companys work force through further centralization, by an increase in net sales of $10.2 million in the Norton Studio product line, an increase in net sales of $2.8 million in the D.P.S. product line and, following the September acquisition of Miss Erika, net sales of $10.4 million for Erika products.

Toward the 21st Century: 1998 and Beyond

A more disciplined mode of operation in the fiercely competitive womens apparel business was reenergizing Nortons niche in its industry. President and Chief Operating Officer Peter Boneparth commented, ... results for the first quarter of fiscal 1998 were in line with managements expectations. The company posted a 28.6 percent increase in net sales and a 26.7 percent increase in operating income over the same period in 1997. Two significant acquisitions were completed during the third quarter of fiscal 1998: Jeri-Jo Knitwear, Inc. and Jamie Scott, Inc. Founded in 1975, New York-based Jeri-Jo/Jamie Scott designed, imported and marketed juniors and misses apparel. The companies retained their current management and operated together as Jeri-Jo Knitwear, Inc., a Norton subsidiary.

For the first nine months of fiscal 1998, Nortons net sales increased 59.5 percent to $227.59 million, compared with $142.7 million for the same period of the previous year. It is noteworthy that sales for the first nine months of fiscal 1998 were considerably higher than the $218.78 million net sales for all of fiscal 1997. When Peter Boneparth became Nortons president in 1997 he commented that within the next three to five years the company could reach annual sales of $500 million. As the 21st century drew near, it seemed that his expectations were within the realm of possibility.

Principal Subsidiaries

Jeri-Jo Knitwear, Inc.; Miss Erika, Inc.; Norton McNaughton of Squire, Inc.

Further Reading

DInnocenzio, Anne, Boneparth Appointed McNaughton President, Womens Wear Daily, May 7, 1997, pp. 1, 18.

_____, Norton McNaughtons New Mode, Womens Wear Daily, May 14, 1997.

Gault, Ylonda, A Familiar Thread at Finity: McNaughton Vet Shelves Retirement To Foster Neglected Sportswear Firm, Grains New York Business, April 27, 1998, Profiles Sec.

_____, Fashioning a Comeback: New Executive Peter Boneparth, Grains New York Business, June 2, 1997, Profiles Sec.

_____, No Casual Fling at Norton: New Executive San Sommers, Grains New York Business, October 21, 1996, Profiles Sec.

Gloria A. Lemieux

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Norton McNaughton, Inc.

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Norton McNaughton, Inc.