Mossimo, Inc.

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Mossimo, Inc.

9 Pasteur
Irvine, California 92618
U.S.A.
(949) 789-0200
Fax: (949) 453-0101
Web site: http://www.mossimo.com

Public Company
Incorporated: 1987
Employees: 250
Sales: $70.9 million (1997)
Stock Exchanges: New York
Ticker Symbol: MGX
SICs: 2329 Men/Boys’ Clothing, Not Elsewhere Classified; 2323 Men/Boys’ Neckwear; 2387 Apparel Belts; 3851 Ophthalmic Goods

A dynamic force in the apparel industry during the 1990s, Mossimo, Inc. sells men’s and women’s sportswear and activewear, retailing its apparel through 100 in-store shops located in department stores and specialty retailers. The Mossimo label, created by Mossimo Giannulli, gained notoriety during the late 1980s, becoming a highly popular brand of beachwear. During the 1990s the company expanded into sportswear and registered great success. Further expansion during the mid-1990s into upscale menswear yielded disappointing results, leading to numbing financial losses. The losses led to a 25 percent reduction in employment and pervasive cost-cutting measures. Giannulli, who presided as chairman and maintained creative control over Mossimo, Inc., owned 73.3 percent of the company, which also included two stand-alone retail stores. The company’s headquarters and production facilities were located in Irvine, California.

Early Success Spawns Expansion

Mossimo Giannulli was born Massimo Giannulli—a slight variation on the name he used to create a half-billion-dollar apparel company. As a child, Giannulli was given the nickname “Moss,” which had evolved into Mossimo by the time he enrolled at the University of Southern California and, shortly thereafter, decided to try his luck as an entrepreneur. Giannulli dropped out of the University of Southern California in 1987, borrowed $100,000 from his father (a landscape architect in Los Angeles), and retreated to his apartment on Balboa Island. There, he developed an entrepreneurial strategy based wholly on marketing, not on product innovation or on product quality. With the money he received from his father, Giannulli began making three-paneled, neon-colored beach volleyball shorts and T-shirts. On each garment, he emblazoned his signature and what would become his trademark “M.” He then peddled his beachwear—referred to as “active wear” in the apparel industry—to local surf shops, loading the garments in the trunk of his car. Almost overnight, Mossimo shorts and shirts became the newest trend on Southern California beaches. The reason for their popularity, as near as anyone could determine, was the Mossimo name, which had transcended from absolute obscurity to a symbol of chic cachet in a matter of months. Though his quick success might have surprised Giannulli, the emergence of his Mossimo garments as a new fashion trend did not. From the start in his Balboa Island apartment, Giannulli was convinced of the wonders marketing could produce in the apparel industry. “From day one,” Giannulli explained, “I have positioned this thing as a lifestyle company.”

Drawing its marketing strength from the power of the Mossimo name, Giannulli’s company recorded blistering sales growth during its first year of existence. By the end of his first year Giannulli had grossed $1 million and generated enough of a profit to pay back his father. By the end of 1989 sales had swelled fourfold to $4 million, infusing Giannulli with confidence and prompting him to test how far the popularity of the Mossimo name could carry him. He decided to expand his product line and thereby market the Mossimo name to a broader customer base, realizing that exponentially higher sales and his legitimacy as a clothing designer could only be achieved by diversifying beyond beachwear. Giannulli hired an experienced designer in 1991 and began manufacturing casual sportswear and accessories, adorning each item with the highly popular Mossimo name. The debut of Mossimo woven sweaters, knit shirts, and fleece sweatshirts marked a pivotal turning point in the company’s development, moving Mossimo, Inc. from the activewear niche of the apparel industry to the decidedly larger sportswear segment. Concurrent with this shift in emphasis toward sportswear, Giannulli gradually began to move away from distributing his apparel to small surf and beachwear shops and focused instead on department stores and large specialty chains, his preferred retail locales. His diversification was a gamble, but the risk paid off. Consumers, mostly teenage customers, clamored for the new Mossimo line of sportswear and accessories, eager to purchase anything with the Mossimo label. In response, Giannulli increased prices and leveraged his success to obtain better deals from his suppliers. The result was an astounding level of profitability that by far eclipsed the net profit margins averaged by his rivals and made Mossimo, Inc. one of the most closely watched competitors in the apparel industry. “I was given a pretty wonderful name,” Giannulli remarked during an interview with Daily News Record, attempting to explain his success. “If I was Tom, I don’t know if we’d be sitting here having this conversation—that was my brother’s name and he’s not here.”

Annual sales by 1993 pushed past $20 million, providing Giannulli with the resources to hatch increasingly more ambitious plans. By this point the company had established its headquarters in Irvine, California, where a 4,600-square-foot factory produced Mossimo activewear, sportswear, and a growing collection of Mossimo accessories, such as eyewear, wallets, belts, bags, shoes, and hats. All of these items, plus the company’s men’s and women’s sportswear, were showcased in Giannulli’s newest creation—his own 2,600-square-foot retail store. Called Mossimo Supply, the store opened in December 1993 in a mall near Costa Mesa, which reportedly attracted 18 million visitors a year. There, amid other retail stores operated by Calvin Klein, Saks Fifth Avenue, Cartier, Tiffany & Co., and Gucci, Giannulli’s store stood, sharing space with some of the apparel industry’s elite designers. Mossimo Supply’s proximity to such company was by design. “It’s a good chance,” Giannulli said, “that somebody will walk out of Armani Exchange or Ralph Lauren and into our store.” Giannulli then offered a telling statement that revealed his professional desires and the future direction Mossimo, Inc. would take. “I want to compete with those people in a big way,” he said. In the coming years Mossimo, Inc. would be shaped by Giannulli’s goal to become one of the industry’s elite fashion designers.

Mid-1990s Growth and Public Offering

Any uncertainty regarding Giannulli’s professional aspirations was eliminated after a 1994 interview with Action Sports Retailer. Giannulli said: “When I look at Calvin [Klein] or Armani or Ralph Lauren, those are the companies I want to be associated with, and I’m not settling for anything less. I will do everything in my power to get there.” To ascend the fashion world’s hierarchy, Giannulli sought to legitimize himself as a designer through Mossimo, Inc., which appeared more than capable of supporting its founder’s climb. On the retail front, another store was opened in New York City as part of Giannulli’s plan to establish a retail presence in a handful of major metropolitan areas, including Dallas, San Francisco, and Chicago, but by 1995 neither of the company’s stores had shown a profit, curbing plans for further expansion. Success in the retail field had been achieved, however, through another venture. Giannulli began opening shops within department stores, establishing his in-store shops in stores such as Macy’s, the Bon Marché, and Dayton Hudson. By the beginning of 1995 there were more than 30 Mossimo in-store shops, selling an apparel line that reflected the “new” Mossimo, Inc. taking shape. By the mid-1990s, activewear—the T-shirts, shorts, and sweatshirts that once represented the entirety of Giannulli’s business—accounted for 60 percent of sales, its contribution to the company’s revenue volume decreasing with each passing year. The balance was derived from the sale of accessories and the company’s sportswear line of knit and woven shirts and denim, which accounted for 34 percent of sales in 1995, up from 20 percent two years earlier. During this transition Mossimo, Inc.’s sales shot upward, increasing at an annual compound rate of 46.6 percent during the first half of the 1990s to reach $110 million by 1995. Profits kept pace as well, primarily because consumers had demonstrated a willingness to pay increasingly higher prices for garments with the Mossimo name. In 1995 the company’s net profit margin rested at 16 percent, far above the six percent averaged by rival Quicksilver and higher than the 13 percent recorded by Tommy Hilfinger, the fashion industry’s phenom. It was against this backdrop of resounding success that Giannulli began, in earnest, to pursue his goal of becoming an upscale fashion designer.

In the first nine months of 1995, Mossimo, Inc. opened 11 in-store shops in nine department stores and specialty chains, giving the company a total of 46 in-store retail locations. Giannulli wanted to establish more stores and he wanted to introduce a more sophisticated apparel line that would improve his standing in the fashion world. Both pursuits required money, so in December 1995 Giannulli announced his plans to sell shares in Mossimo, Inc. to the public, intending to use the proceeds from the initial public offering (IPO) to finance the establishment of new in-store shops, reduce debt, and pay for a new headquarters and distribution facility. The IPO was completed in February 1996, making 32-year-old Giannulli the youngest chief executive officer of a company listed on the New York Stock Exchange. More important, the IPO raised $36 million, more than twice the total expected when the public offering was announced two months earlier. Mossimo, Inc.’s stock debuted at $18 a share and skyrocketed to $50 a share by June 1996, enriching investors exponentially in a four-month span. Giannulli and everyone associated with the company were ecstatic. One Wall Street analyst described Giannulli as the “next Calvin Klein,” precisely the recognition Giannulli had been seeking. To spark further enthusiasm, the company’s prospects pointed to an even greater growth. The entire Mossimo collection was being distributed in Japan, Canada, and Australia, with an aggressive European expansion plan slated to begin in 1998. Before the push into Europe, Giannulli planned for a high-profile fashion show in New York City in 1997 and hired approximately a dozen designers and executives from competitors such as Calvin Klein and Guess. It was difficult to imagine Mossimo, Inc. occupying a more enviable position than it did as the fall 1996 fashion season approached, but by the time the fall season did arrive, Giannulli found himself in desperate straits. Mossimo, Inc.’s stock value began to plummet, stripping Giannulli of hundreds of millions of dollars.

Late 1990s Fall from Grace

When Mossimo, Inc. reported at the end of September 1996 that its profits were down nearly 50 percent for the third quarter, the company’s stock plunged to $15 a share within a month. Giannulli, who owned 73.3 of Mossimo, Inc.’s stock, saw his net worth reduced by $380 million. To blame were high production and development costs, which reduced earnings and caused the value of the company’s stock to cascade downward. Giannulli conceded that “we overdeveloped,” but remained optimistic despite his huge financial loss, saying, “ultimately we will hit the numbers.” Traded as a publicly owned company, Mossimo, Inc. needed to demonstrate consistent, quarterly profits to maintain its value, but after years of profitability as a privately held firm, the company failed to generate profits when profits were needed most. Critics cited the company’s rapid expansion as the cause, explaining that operationally Mossimo, Inc. was ill-equipped to embark on the ambitious plans developed by Giannulli. Amid this criticism, Mossimo, Inc.’s profits slid quarter by quarter, prompting one shareholder to file a lawsuit against the company, charging that Giannulli had “completely lost control of the company’s operations.” By February 1997—one year after the company’s IPO—Mossimo, Inc.’s stock had dipped below $9 a share, causing further anxiety. The company lost $498,000 during the first quarter of 1997, compared with a $5.8 million profit for the same period one year earlier. To combat chronically deteriorating profitability, Giannulli reverted to a page from his own history, rekindling memories of his days as an upstart operating out of a Balboa Island apartment.

In May 1997, after closing his watch division, Giannulli announced plans for a new line of Mossimo activewear, the cotton T-shirts and swimwear that had given him his start. It was hoped that the introduction of this new, lower-priced line of activewear, combined with continuing efforts to reduce costs wherever possible, would arrest the company’s perilous financial slide, but the losses continued to mount. By the fall of 1997, after posting a $4.8 million loss and a 46 percent decrease in sales for the company’s third quarter, Giannulli had decided to seek help.⁴ ’I am looking for a really good operational head who will be in partnership with me,” he announced. “I want someone who will help us grow a long time, and stay for a while, not someone who will just come in and out of this joint.” Giannulli dropped the titles of president and chief executive officer in favor of the more ephemeral title of “visionary,” yet remained chairman as the search for a savior went forward. In January 1998 John P. Brincko, a turnaround specialist credited with reviving Barney’s Inc. and Knudsen Foods, was hired as a consultant, arriving at a desperate juncture in Mossimo, Inc.’s history. For the fourth quarter of 1997 the company expected to lose roughly $14 million, nearly identical to the sum it hoped to generate in sales. In March 1998 Brincko took over as president and chief executive officer, inheriting a company that lost $18.7 million in 1997 on $70.9 million in revenues, which represented a 34 percent decline from 1996’s sales volume.

By the time Brincko assumed operational control over the company, Giannulli’s wealth had shriveled from $550 million in the summer of 1996 to $60 million. As Brincko scrutinized every aspect of Mossimo, Inc.’s business, including distribution, marketing, production, sales, inventory, and financial management, Giannulli’s Laguna Beach estate was up for sale, making his fall from the top more precipitous than the startling pace of his ascension. Looking ahead, Brincko was hoping for the turnaround he had been hired to execute, but the company’s profitability problems continued to hobble progress as the end of 1998 approached. Mossimo, Inc. reported a $6.1 million loss for 1998’s second quarter, and by the fall its stock had fallen to less than $3 a share, reducing the value of Giannulli’s stake to $30 million. Brincko was optimistic, however, saying that the company’s 1999 line of denim and knit tops would show that Mossimo, Inc. was “headed in the right direction.” The validity of such hope was to be determined in the years ahead, as Brincko sought to rebuild what had been created by Giannulli and ensure that Mossimo, Inc. could look forward to a future.