Koret of California, Inc

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Koret of California, Inc.

505 14th Street
Oakland, California 94612
U.S.A.
Telephone: (510) 622-7000
Fax: (510) 622-7110
Web site: http://www.koretsf.com

Wholly Owned Subsidiary of Kellwood Company
Incorporated: 1938
Employees: 300 (est.)
Sales: $300 million (1998, est.)
NAIC: 315232 Women's and Girls' Cut and Sew Blouse and Shirt Manufacturing; 315999 Other Apparel Accessories and Other Apparel Manufacturing

Koret of California, Inc., has been making moderately priced apparel for women since 1938. Over the decades, the company has passed through stages as a private family-owned concern, an acquisition-oriented public company, and a subsidiary of larger apparel enterprises. Koret is now a subsidiary of Kellwood Company, a $2.4 billion concern that markets a host of brand names in men's and women's wear. Koret first achieved widespread recognition in the early 1960s when it invented a permanent press process that was widely adopted in the apparel industry. Royalties from the process fueled a period of reckless expansion through acquisitions, after which Koret regained solid footing by focusing on its core women's wear operations. Koret now produces and distributes sportswear for women under the Koret, Beliza, and Napa Valley brand names. Its primary customers are department stores, where Koret is a leading label in the moderately priced range. The company also has factory outlet stores in 27 states. Headquartered in Oakland, California, it has sales offices in Los Angeles and New York and a distribution center in northern California. Koret's product lines, which included coordinated pants, blazers, and blouses, are mainly targeted at women over 45.

A Skirt-and-Sweater Partnership: 1938–66

In 1938 a husband-and-wife team, Joseph and Stephanie Koret, founded Koret of California in a small loft in San Francisco. Joseph was a sweater salesman at the time, while Stephanie was taking classes in fashion design at a local school. She began making skirts to go with Joseph's sweaters, and the two launched the Missy line of coordinated women's apparel. Joseph played the role of salesman and promoter at the young company, and Stephanie was in charge of design and human resources. Over the next two decades, the company made a name for itself as a small but successful producer of coordinated skirts and sweaters. The Koret Trickskirt pleated skirt, which sold 3.5 million pieces, was introduced in 1946.

Koret made a major breakthrough in 1961 when it developed the Koratron permanent press process, which it used to put pleats in its skirts. Specifically, Koratron was a "post-curing" process: fabric received a chemical pretreatment and, once made into a finished garment, heat was applied to activate the permanent press properties. The resulting garment was better able to hold its shape and resist creases. Koret executives had developed the process as a marketing ploy and started running ads across the nation announcing that they had emancipated women.

Koret began licensing the Koratron process around the world. A whole new permanent press market developed and royalties began pouring in. Levi Strauss was the first company to license the process in 1963. Over the next few years, about 400 other companies licensed the process and paid Koret a 1 percent royalty on sales of permanent press garments. By 1966, royalty revenues were twice as much as clothing sales; net sales that year were $33 million.

Investment bankers began encouraging the royalty-rich company to go public. Stephanie was uneasy with the idea, but Joseph saw it as an opportunity for his wife to be able to retire and for him to be able to afford a boat and other luxuries. Koret went public in May 1966 and raised $11.5 million. Soon afterwards, Stephanie retired and the company changed its name to Koracorp Industries, Inc.

Patent Battles and Ill-Advised Acquisitions in the 1970s

The company ran into difficulties soon after the initial public offering. As Joseph Koret told Forbes magazine in 1975, Stephanie's departure was a turning point. "The worst thing I ever did was let my wife retire," he said. She had always been the "voice of reason," according to Joseph. "She was the restraining spirit. I tended to be too aggressive, too ruthless. My wife was the one who prevented me from going too far." Stephanie had also been in charge of hiring, and many of the people she employed stayed at Koret for decades. However, her health declined quickly after her retirement, leaving Joseph on his own to guide Koracorp through a series of new challenges.

Patents on the Koratron permanent press process were due to expire in 1978, so the company needed to find a way to replace royalty revenue. In fact, royalty revenues started to decline drastically a decade before the patent expiration as companies developed their own permanent press procedures. In 1967, several hundred licensees stopped paying royalties to Koret, contending that the Koratron patent did not cover their own permanent press fabrics and processes. Koracorp charged companies such as Deering Milliken, Inc., Blue Bell Inc., and Levi Strauss & Co. with patent infringement. In turn, many apparel companies started legal proceedings against Koracorp, alleging fraud of the Patent Office, breach of antitrust laws, and other violations. Royalty income plunged, accounting for only 10 percent of earnings in 1971.

The apparent way out was for Koracorp to acquire new sources of revenue by using its considerable store of funds to purchase other companies. Joseph's forte, however, was marketing, so he sought someone else who could carry out an acquisition strategy. In the late 1960s, he hired Jeré Helfat, a management consultant who had advised the Korets several years earlier on taking the firm public. Helfat became president, and Koret stayed on as Koracorp's chairman.

Helfat's vision was a company structured into several different operating centers, including men's apparel, women's apparel, venture capital, and international divisions. He embarked on an acquisition spree in the late 1960s, but many of his purchases turned out to be poor choices. Helfat bought men's and women's apparel makers whose operations were unprofitable and had to be discontinued. He acquired two unprofitable hat makers on the conviction that hats were coming back. He also bought a French maker of infant clothing before discovering that financing was unavailable to him. Koracorp's venture capital division, known as Koratec, invested in a direct mail magazine called Homemaking with a Flair that contained coupons for household products. The magazine reported profits, and the core Koret women's apparel operations were still doing well. The company reported a profit of $2.1 million in 1971 on sales of $92 million.

By 1973, however, an accumulation of money-losing acquisitions was dragging Koracorp into the red. Long-term debt that year reached $37 million. Nevertheless, company management delayed refinancing in the hope that better times were just around the corner. Finally, Koracorp's bankers insisted that the company liquidate its receivables, many of which were in the coupon magazine operation. Yet when Koracorp started to take action, it discovered that most of the magazine's receivables existed only on paper, and most of the division's profits had been fabricated. The disastrous situation pushed Koracorp to the brink of bankruptcy.

Joseph Koret fired Helfat but did not want to take the helm himself, disheartened as he was by his company's nosedive. He took the post of "chairman emeritus" and persuaded Thaddeus Taube, a board member and real estate consultant, to take over as chief executive. Taube and the company treasurer Joseph Berghold dumped most of Koracorp's subsidiaries and took an $11 million loss. The banks decided to give Koracorp a chance and provided $50 million in credit and fresh capital, with Joseph and Stephanie Koret's 37 percent stake in the company acting as collateral. Koracorp gradually recovered value in the mid-1970s by relying on its dependable women's apparel label. The company produced a moderately priced velvet blazer in 1973 that sold over a million pieces and introduced coordinated denim sportswear in 1977 under the City Blues label. In 1976, the Koret label also moved into special sizes when it initiated a "women's size" or plus-size division. Net income was $7.8 million in 1978 on sales on $185 million. Koracorp had acquired a solid reputation among retailers by this point. "Nobody is better than Koret in dealing with customers," William Hansen, the president of Los Angeles-based Buffums' chain, told Business Week in 1979.

A Levi Strauss Subsidiary: 1979–86

Levi Strauss & Co. bought Koracorp Industries in 1979, giving CEO Taube the chance to go back to the real estate business. Besides the Koret label, the Koracorp acquisition also included Oxxford Clothes, a maker of men's suits, the hat maker Byer-Rolnick, and men's sportswear maker Himalaya. This was Levi Strauss's first major acquisition and its first venture outside jeans manufacturing. The Koret label eventually became part of Battery Stressed Enterprises, Levi Strauss's non-jeans division. Koret further developed its women's wear line under Levi Strauss. A petite division was started in 1981. In 1982, the label moved into production of separates with Koret Separate Impressions, a line of coordinated garments that were in stock year-round. The next year, Koret introduced its Flatter Fit pant, featuring a Lycra spandex panel that held in the stomach. The pants were a great success and sold millions, contributing to a period of record growth for Koret in the mid-1980s.

Company Perspectives:

Mission: Design, produce, and distribute moderate-to-bridge price women's sportswear and separates with focus on classic through modern lifestyles.

Richard Banks was Koret's chief executive at Levi Strauss. He led a campaign to encourage department stores to devote more attention to moderately priced apparel. An excessive amount of space was assigned to high-end apparel, Banks contended, even though moderately priced labels like Koret contributed more reliably to sales. Koret implemented several promotions, including a gift-with-purchase program and a point-of-sale fixture called the Multiplier that demonstrated how shoppers could coordinate Koret clothes. In addition, the label introduced supplementary product lines called "satellites" that contained about 15 styles instead of the 60 in major groups. The satellites took a so-called "fashion forward" approach, demonstrating that Koret was aware of what was happening in the fashion world even as the company's overall operations remained centered on less edgy styles for the 45-and-up demographic. In the early 1980s, Koret also started a division to market its products in Canada. The division became profitable around 1985 after a few years of losses.

By 1986, Levi Strauss was ready to drop its diversified apparel operations and refocus on jeans. Koret CEO Banks signed a leveraged buyout agreement that summer but later backed out of the deal and stayed in a position at Levi Strauss. Instead, the investment banking firm Oppenheimer & Co., which had been involved in arranging the management buyout, stepped in and formed KNA Acquisition Corp. to buy Koret. In November of that year, Levi Strauss sold its Koret of North America subsidiary, which included Koret of California and Koret of Canada, to a group of investors that included Oppenheimer executives, Koret management, and other individuals. Marty Granoff, a major investor in the buyout and the owner of a New York knitwear manufacturer, was named chairman. The new president was Richard Einstein, who had been with Koret since 1967. KNA Acquisition Corp. changed its name to Koret, Inc. in 1987.

Development as a Private Company in the 1990s

As an independent private company, Koret continued its reliable women's wear line and also expanded through a few apparel and accessory acquisitions. In 1989, the company formed the subsidiary Counterparts Sportswear, Inc. to acquire the assets of two women's apparel companies manufacturing under the Counterparts label. The following year, Koret closed its sewing factory in San Francisco, laying off about 300 workers, and shifted manufacturing to Guatemala, where labor costs were much lower. The company also contracted with domestic manufacturers. In 1992, Steven Rudin replaced Richard Einstein as president of Koret. Previously, Rudin had been Koret's chief financial officer for four years. Koret earned $20 million in 1994 through a private placement of three million shares of common stock and used some of the funds to retire debt carried over from the leveraged buyout.

Later in 1994, Koret's Canadian subsidiary paid about $7 million for Mr. Jax Fashions, Inc. of Vancouver. Mr. Jax was a designer and manufacturer of upscale sportswear and one of Canada's leading apparel makers. The company had been posting losses and cutting back on operations; Koret planned to work with the company's existing designers and product lines to bring the label back to profitability. The acquisition of Mr. Jax gave Koret an entry into the upscale apparel market. Koret also bought MJF Imports, Inc., an American company that sold the Mr. Jax line in the U.S. market. In 1995, Koret Canada, Inc. and Mr. Jax Fashions merged to form West Coast Apparel, Inc.

Further acquisitions came in the spring of 1995, when Koret bought Campaign Inc. and Pheasant Inc. of Norfolk, Virginia, two separate companies that shared a factory making belts, wallets, and other leather goods for men and women. The two companies were the exclusive licensees for Ralph Lauren leather accessories and had combined sales of about $30 million. They were merged to form the Koret subsidiary New Campaign Inc. This was Koret's first licensing deal. Three years later, Koret won a license from Connecticut-based Carolee Designs to make handbags, belts, and other small leather goods.

Koret introduced a stain-resistant line of clothing, dubbed Korapel, in 1995. The garments were made of Dacron polyester and wool crepe and treated with Du Pont's Teflon fabric protector. Koret also updated its line for 25 to 46 year olds in the mid-1990s, but older women were still the company's major customers. With its petite and plus-size divisions, Koret had a tradition of making garments for specialized fits. The company used newly available data to adopt a new set of measurement standards for women over 55, replacing standards that dated from 1940. The company also introduced an "insta-fit" program in 1994, featuring pants with a mechanism on a track that let the wearer adjust the waistband by three inches.

Koret sold its Counterparts label to Tabah Family Enterprises of Montreal in 1998 in order to focus more attention on the Koret line. That year, the company also considered transferring product distribution from a company-owned center in Chico, California, to a third-party facility and changing its contract to do sewing in nonunion shops. Union organizers, however, handed out leaflets at Koret outlet stores, which brought the company to the bargaining table. Koret agreed to retain domestic production in union shops and keep distribution at the Chico center. Many orders at the center were being filled incorrectly, so Koret implemented an incentive system that allowed workers to earn more for accurate work.

Key Dates:

1938:: Joseph and Stephanie Koret found a sweater and skirt business in San Francisco.
1946:: The Koret Trickskirt pleated skirt is introduced.
1961:: Koret develops the Koratron permanent press process and earns royalties by licensing it to other apparel manufacturers.
1966:: Koret goes public and changes its name to Koracorp; Stephanie Koret retires.
1967:: Koracorp hires Jeré Helfat to manage an acquisition strategy as legal proceedings challenge Koratron patents.
1973:: Helfat is fired; the company takes an $11 million loss as unsuccessful acquisitions are dumped.
1979:: Koracorp is acquired by Levi Strauss.
1983:: The Flatter Fit pant is a success and contributes to a growth period.
1986:: Koret management and other investors acquire the company from Levi Strauss in a leveraged buyout.
1994:: Koret buys Mr. Jax Fashions of Canada.
1999:: Koret is acquired by Kellwood Company.

A Kellwood Subsidiary: 1999 and Beyond

In 1999, Koret determined that it could improve its competitive position in the increasingly consolidated garment industry through a merger with a larger group. In April, it pooled shares with Kellwood Company, an apparel manufacturer and marketer with a suite of men's and women's wear brands. The merger included Koret's subsidiaries Koret of California, New Campaign, and the Canadian branch West Coast Apparel. Koret's annual sales at the time were around $300 million.

Rudin remained chief executive through the merger but was eventually replaced by Fred Smeyne, who had a 30-year history at Koret. Later in 1999, Koret moved its headquarters from San Francisco to Oakland. This allowed it to put its administrative offices and product development operations under one roof; the administrative offices had been moved out of the nearly century-old Mission Street building after the 1989 earthquake.

As a Kellwood subsidiary, Koret of California continued making moderately priced sportswear and career apparel in its Koret Francisca, Koret City Blues, and Career Dressing lines. It also made apparel exclusively for Dillard's department stores under the Napa Valley label and clothing with "modern styling" under the Beliza label. Jax Canada and New Campaign Inc. also continued operations as Kellwood subsidiaries. Harold S. Brooks took over the chief executive position at Koret of California from Fred Smeyne in 2003. Brooks had a 30-year retail background and most recently had been president of a division of May Department Stores in St. Louis, Missouri. At the time, Koret of California was the second largest of about a dozen womenswear businesses at Kellwood and was considered one of the company's core brands.