Pluma, Inc.

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Pluma, Inc.

801 Fieldcrest Road
Eden, North Carolina 27288
U.S.A.
(336) 635-4000
Fax: (336) 635-3488
Web site: http://www.plumainc.com

Public Company
Incorporated: 1986
Employees: 2,400
Sales: $134.6 million (1997)
Stock Exchanges: New York
Ticker Symbol: PLU
SICs: 2253 Knit Outerwear Mills; 2329 Men’s & Boys’ Clothing, Not Elsewhere Classified; 2339 Women’s Misses & Juniors’ Outerwear, Not Elsewhere Classified; 5136 Men’s and Boys’ Clothing & Furnishings; 5137 Women’s, Children’s & Infants’ Clothing & Accessories; 5699 Miscellaneous Apparel & Accessory Stores

Pluma, Inc. is a vertically integrated manufacturer and distributor of high-quality fleece and jersey activewear, selling its products under its own brand names to both retailers and wholesalers. In addition, it sells to screen printers and embroiderers who sell the company’s products to a wide variety of retailers. The company name is derived from the Latin word for fleece.

Mid-1980s Founding

Pluma was founded in Eden, North Carolina, in 1986 by R. Duke Ferrell, Jr., George Wade, G. Walker Box, C. Monroe Light, and two other executives at Bassett Walker, Inc., a fleece manufacturer based in Martinsville, Virginia, that was acquired by VF Corp. in 1984. Pluma’s beginnings were reportedly so modest that Wade—the company’s first president and chief executive officer—and two others shared an office and a telephone dropped from the second-floor window each morning and pulled up each evening. The company’s original product was fleece sweatsuits made with heavier fabrics in order to tap a high-end market that most large manufacturers had ignored.

Pluma posted annual profits from its inception and had sales of about $60 million in 1989. The company added heavyweight cotton jersey products suitable for outerwear in 1990 in order to diversify its product mix and use its manufacturing base more efficiently. By 1992, Pluma had revenues of $83.6 million, net income of $4.8 million, was employing 1,500 people, and had six plants to do its knitting, dyeing, cutting, and sewing. Most of its customers during this time were screen printers who put college and athletic-team logos on its clothing and sold the goods to university bookstores and department stores. Ferrell succeeded Wade as president of the company in 1992 and as chief executive officer in 1993.

Pluma’s annual revenues increased each year, passing the $100 million mark in 1995. Net income was more variable, falling to $3.8 million in 1993, rising to $4.3 million in 1994, but then dropping to $1.1 million in 1995. The latter figure excluded a $2 million charge to bring the company’s sales and marketing in-house and a $3.3 million writeoff for doubtful accounts. At the close of the year Pluma purchased Box & Co., which had been its first exclusive sales agent. G. Walker Box then became chairman of Pluma’s board. In 1996 revenues surged to $127.8 million and net income to a record $5.8 million. Fleece accounted for 63 percent of sales and jersey for 37 percent.

Public Offering in the Mid-1990s

Pluma went public in February 1997, marketing 2.5 million shares of common stock (about 32 percent of the total) at $12 a share. In addition, existing shareholders sold another 600,000 shares. The nearly $30 million raised by the company from the sale was applied to reduce its outstanding debt, which had reached $43.6 million at the end of 1996 under a revolving credit facility.

In its preliminary prospectus, Pluma revealed that it was selling its activewear to such major branded sports companies as Adidas, Nike, and Starter, and also to such entertainment firms as Walt Disney, Busch Gardens, and Hard Rock Cafe. It was also marketing its products under its own Pluma, Santee, and Snowbank labels to such retailers as Sam’s Club, a division of Wal-Mart Stores. Other customers included wholesale distributors, screen printers, and embroiderers.

During this time Pluma introduced an all-cotton fleece pique and a five-way stretch fleece in a cotton and Spandex blend. The company stated that it had made significant investments for the sake of efficiency, including upgrading knitting equipment, adding computerized monitoring and control systems for its dyeing processes, and installing new machines to improve cutting and sewing. Among its innovations was a patented tandem sewing table.

According to Pluma’s prospectus, the company was competing in an activewear industry that grew to about $40 billion at retail in 1996. Major competitors were said to include diversified companies such as Fruit of the Loom, Inc., VF Corp., and Sara Lee Corp., and fleecewear specialties such as Oneita Industries, Russell Corp., and Tultex Corp. Pluma attributed the growth of activewear to increased fitness and the “casualization of America,” which had led to an increased acceptance of fleece and jersey products.

The company listed as another asset what it described as “The versatility of fleece and jersey fabric,” which “coupled with technological advances in product development and manufacturing, has significantly improved product design and quality, resulting in increased consumer demand.” It observed that the basic styles of fleece and jersey activewear are not “primarily driven by fashion trends or fads, contributing to the stability of product demand.”

Just before the end of 1997, Pluma announced it had completed the acquisition of substantially all of the assets of Frank L. Robinson Co., a Los Angeles-based wholesale distributor. Founded in 1936, this company was operating two facilities in California and in 1996 posted revenues of about $48 million while serving more than 3,000 customers. At this time Pluma also acquired Stardust Corp., a wholesale distributor founded in 1988 and based in Verona, Wisconsin. Stardust was serving more than 6,000 customers in the apparel industry and had revenues of about $64 million in 1996. This purchase of two former customers, at a cost of $68 million, enabled Pluma to make strides toward a national distribution network and thereby bring the company closer to the ultimate consumer—the retail customer.

Also in 1997, Pluma became a partner with a Mexican corporation in a joint venture located in Aguascalientes, Mexico, which began sewing a small portion of its products. During the year Pluma also contracted with four independent Mexican contractors to sew some of its goods.

Pluma reported revenues of $134.6 million for 1997 but net income of only $2 million, partly because switching to the new computer system had caused production interruptions. Management also relocated some operations, delaying shipments as much as six weeks. The company lost money during the first half of 1998, shipping fewer goods than usual to its acquired distributors in order to reduce inventory and taking a $1.6 million charge. It also lost money in the third quarter, increasing its loss during the first nine months of the year to $5.3 million, even though sales had increased by 46 percent to $144.9 million. After reaching a high of $16.50 a share at mid-year 1997, Pluma’s stock skidded to about $7 a share in early 1998 and dropped below $1 a share at times later in the year.

The company expected to save on labor costs by establishing another joint venture in Mexico with a company that would sew some of its goods in Mexico’s state of Chihuahua. Pluma anticipated that it might have up to 30 percent of its products sewn in Mexico in 1998. It was also pursuing the possibility of having another 20 percent of its goods sewn in Honduras. In October 1998 Pluma said it had initiated several cost-cutting measures, including eliminating more than 11 percent of its approximately 850 non-manufacturing employees, or about four percent of its total employees. The staff reductions, as well as planned salary cuts for senior company executives, were expected to reduce annual expenses by about $2.4 million.

Securities analysts generally agreed with the company that many of Pluma’s problems were only temporary. One industry observer expressed her confidence in the company’s long-term outlook once the computer system was fully installed. However, she also noted, “It’s difficult to totally maintain your profit and margins when you have someone like Fruit of the Loom consistently cutting prices.”

Products and Facilities in the Late 1990s

Pluma’s fleece products in 1997 included various styles, colors, and weights of tops and bottoms in all-cotton and varying blends of cotton and polyester. The company also was manufacturing all-cotton jersey tops and bottoms designed for outerwear in two different weights. Fleece products accounted for 61 percent of Pluma’s sales in 1997 and jersey products for the remaining 39 percent. Jersey products generally were cheaper and generated lower profit margins than fleece. The company was selling products under its own Pluma, Santee, and Snowbank brand names to retail and wholesale customers.

Company Perspectives:

Pluma’s mission is to significantly grow our business, both internally and externally, through acquisitions, joint ventures and contractors, which leverage our industry knowledge and manufacturing strengths, provide us a global presence and support the diversification of our distribution.

Pluma’s fleece products in 1997 included a variety of styles and colors of tops and bottoms on 7½-, 9-, 10-, and 11-ounce weights in cotton/polyester blends starting at half-cotton/half-polyester and progressing to all-cotton. Pluma also manufactured 5½- and 7-ounce all-jersey tops and bottoms designed for outerwear. The company cited these advantages, relative to the products of most of its competitors: fleece and jersey tops fuller cut and heavier weight; higher-stitch-count fabrics to reduce shrinkage, provide a better printing surface, and increase softness; air-jet spun yarn for its half-cotton, half-polyester fleece fabric, in order to prevent pilling; Spandex to retain shape for all the company’s ribbed fabrics; greater detail in its sewing processes to enhance durability and appearance; and advanced finishing techniques, including the application of softeners and napping (brushing), to give its fleece fabrics more bulk and softer texture.

Branded accounts constituted 23 percent of Pluma’s net sales in 1997. These accounts consisted of customers such as Adidas and Starter and required the company to meet exact specifications of manufacturing, such as styling, color, screen printing, and embroidery. Retail customers were responsible for 41 percent of net sales. Pluma’s main customer in 1997 was Sam’s Club, which marketed and sold Pluma-labeled products and accounted for 31 percent of the company’s net sales. Other retail customers included Miller’s Outpost, which sold its own private-label products manufactured by Pluma or products with Pluma’s Santee label. Pluma also granted a license to Kayser Roth Corp., allowing it to manufacture and distribute socks to Sam’s Club under the Pluma brand name.

Branded and retail customers generated higher gross margins for the company than its other customers, screen printers and embroiderers (11 percent in 1997), wholesale distributors (17 percent), and entertainment (eight percent). Screen printers and embroiderers such as Endless Design and Embroidery Services were typically purchasing basic products from Pluma to which they added design and logos and then resold these products to a wide variety of retailers, ranging from small souvenir and resort stores to large nationwide department stores.

Wholesale distributors such as Skyline and Alpha, in addition to Pluma-acquired Robinson and Stardust, generally purchased the company’s goods in large volume for further distribution to companies such as Guess? as well as to small companies typically more difficult for Pluma to service. All products sold to wholesale customers contained Pluma’s Santee label. Entertainment accounts included customers such as Walt Disney, Busch Gardens, and Hard Rock Cafe. These clients demanded a basic product on which designs were printed or embroidered for souvenir sales.

Pluma’s main factory was in Eden, where it had machinery for circular knitting, pressured dyeing, finishing, and cutting. Sewing of preassembled parts was being performed in Eden and also in company facilities in Altavista, Chatham, Martinsville, Rocky Mount, and Vesta, Virginia. In addition, some 15 percent of Pluma’s products were being sewn by independent contractors in 1997. Packaging and distribution were being performed in Martinsville.

G. Walker Box was Pluma’s largest stockholder in early 1998, with nearly ten percent of the shares. Other stockholders with more than five percent of the shares included Ferrell, Wade, and a Goldman, Sachs & Co. partnership. Pluma’s long-term debt was $40 million at the end of 1997.