Description

Tropical Sportswear International Corp. designs, produces, and markets branded and private label apparel products sold through retailers at all levels and channels of distribution. Their products consist of casual and dress-casual pants, shorts, jeans, and woven and knit shirts for men, women, and children. They manufacture over 75 brands in total including:
Owned brands consist of: (60% of revenues)
Savane (25% of revenues, sold through department stores/specialty stores)
Farah (15% of revenues, sold exclusively through Wal-Mart now)
Duck Head (5% of revenues)
Flyers
Original Khaki
Bay to Bay
Two Pepper
Royal Palm
Banana Joe
Authentic Chino Casuals
Licensed brands consist of: (8% of revenues)
Victorinox, makers of the original Swiss Army Knife
Bill Blass
Van Heusen
John Henry
Retailer national private brands consist of: (32% of revenues)
Puritan
Member’s Mark
Sonoma
Croft & Barrow
St. John’s Bay
Charter Club
Roundtree & Yorke
Geoffrey Beene
G.H. Bass
Izod
White Stag
Customers include
Wal-Mart
Sam’s Club
Kohl’s
J.C. Penny
Dillard’s
Sears
Philips-Van Heusen Retail Outlets
Federated
Belk
May Company
Saks
BJ’s
Mervyn’s
Costco
The key competitive advantage that TSIC possesses is with its industry leading production cycle. Upon receiving an order from a customer, TSIC can have the product produced and delivered within 26 days. This compares to 80-90 for most of their competitors. In the current retail environment, retail customers desire to do business with TSIC is clear. Forecasting apparel inventory needs out one month is much easier, effective, and holds less risk than 3 months. This reduces the chance that stores are left with excess inventory and are forced to use markdown to move their products. Many companies have been hurt recently by this problem from buying more product than demanded as well and not keeping up with trends/fads and being stock with outdated merchandise. And unlike some of their competitors, there is no risk of product being pushed back to TSIC because the sale is completed upon delivery (some companies have been hurt by allowing returns just to get their products put in the stores).
Due to TSIC’s efficiency, their customers have been shifting more of their apparel business to Tropical and away from competitors. . For example, Kohl’s and Mervyn’s have both signed deals to rollout the Savane brand to all of their stores beginning in 2003. TSIC has become so good at what they do that it makes economic sense for them to have TSIC produce their private labels rather than do it in-house. Thus TSIC has become a way to benefit from the explosive growth of the leading retailers like Kohl’s and Wal-Mart without paying the prices that those companies stocks command. The largest retailer that is not currently doing business with TSIC but is in talks to do so is Target. A relationship is virtually inevitable as Target is at a great disadvantage versus their competitors without one.
Besides playing the growth of TSIC’s customers, there are several other opportunities for the business to flourish. Shirts only account for 4% of the company’s revenues currently. This has become an area of focus for management and they play to increase this portion of their business through the addition of the Duck Head brand that they recently purchased. Management has also begun to focus on the women’s side of the business and plan to raise this as a % of their overall revenues (also represents 4%). TSIC has said that they will continue to explore acquisitions as a means to grow and acquire leading brand names like they have done in the past. A perfect example of their intent can be seen in their 2001 acquisition of Duck Head. TSIC paid only 17.8 million for this company that was holding 6 million of net cash on its balance sheet. They quickly sold of the corporate headquarters for 7 million and ended up with a brand that had done 45 million in sales the prior year and whose trademark name was estimated at 6 million. While opportunities like these don’t show up often, TSIC will continue to search for them and will only pursue deals that are accretive within 6 months to a year.
This past week TSIC did a secondary offering which included 3 million of primary shares. 1.2 million shares were originally set to be sold by various shareholders. However as the stock traded significantly off its high, these holders decided to hold on to their these shares rather than sell at the $22.65 price set for the offering. The funds raised by the company are to be used for the paying off of its credit facility, the building of its new office building in FL (they shut down their office in El Paso, TX), repaying a portion of a real estate term loan, and for working capital.
The main risk I see with this company (besides a weaker consumer environment) is from Tropical’s leading customers squeezing their margins. As the Wal-Marts of the world do more and more business with TSIC, they may begin to ask for greater volume price reductions. While this risk is clear, I believe that TSIC can overcome it as long as they hold their advantage in production cycle times versus their competition. Wal-Mart can’t simply threaten to leave them without large price reductions since their opportunity cost is too high currently. Another perceived risk might be that TSIC’s apparel loses relevance with its customers. However, their apparel is of the least risky basic variety. They do not try and lead or follow fashion trends, but instead produce the kind of clothes that time tested.

Valuation:
Apparel manufactures generally don’t trade at very high multiples due to their low perceived growth prospects (ex new hot brand companies). At 16.1x ’02 $1.36 EPS, TSIC trades in line with its competitors, but does not take into account its much higher growth outlook. Another year out we are looking at a much lower multiple of 11.6x on ’03 $1.89 EPS. These estimates are both in line with company guidance and of the two brokerage firms that recently initiated on them (Merrill and Well Fargo who were on the secondary). Enterprise value to EBITDA is at 8x ’02 and 7.2x ’03.

Tropical Sportswear Int'l
6/16/2002
Symbol TSIC
Stock Price $21.91
52 week High 29.55
52 week Low 14.00
% off high -25.85%
% off low 56.50%

Shares Outstanding 10.893
Market Capitalization 238.7
Float 4.50
Short Interest 0.01
Short/Float 0.31%
Avg. Daily volume (in 000s) 18
Avg. Daily volume $$ (in 000s) 394
Avg. Daily volume (in 000s) L10days 53
Avg. Daily volume $$ (in 000s) 1,161
Days to Cover 0.8

Book Value 12.03
Price/Book 1.8

Fiscal Year
I. P/E VALUATION 09/2001
Earnings Per Share (CY)
1998 1.43
1999 1.64
2000 2.17
2001 1.56
2002E 1.36
2003E 1.89

Price/Earnings 1998 15.4
1999 13.3
2000 10.1
2001E 14.0
2002E 16.1
2003E 11.6

Earnings Growth
1999 to 2000 32.3%
2000 to 2001 -28.2%
2001 to 2002 -12.8%
2002 to 2003 39.0%
2000-2002 average -4.5%
2002 PE/Growth Rate -3.6
First Call LT growth rate 18.0%
2002 PE/FC LT Growth Rate 0.90


Quarterly Earnings: Calendar year
1998a 1Q 0.43
1998a 2Q 0.40
1998a 3Q 0.41
1998a 4Q 0.30

1999a 1Q 0.51
1999a 2Q 0.42
1999a 3Q 0.19
1999a 4Q 0.38

2000a 1Q 0.68
2000a 2Q 0.74
2000a 3Q 0.54
2000a 4Q 0.42

2001a 1Q 0.74
2001a 2Q 0.23
2001a 3Q 0.28
2001a 4Q 0.38


Quarterly Earnings Growth
1998 - 1999 1Q 18.6%
1998 - 1999 2Q 5.0%
1998 - 1999 3Q -53.7%
1998 - 1999 4Q 26.7%

1999 - 2000 1Q 33.3%
1999 - 2000 2Q 76.2%
1999 - 2000 3Q 184.2%
1999 - 2000 4Q 10.5%

2000 - 2001 1Q 8.8%
2000 - 2001 2Q -68.9%
2000 - 2001 3Q -48.1%
2000 - 2001 4Q -9.5%
Quarterly Revenues
1998a 1Q 36
1998a 2Q 70
1998a 3Q 112
1998a 4Q 112

1999a 1Q 111
1999a 2Q 111
1999a 3Q 105
1999a 4Q 105

2000a 1Q 105
2000a 2Q 124
2000a 3Q 124
2000a 4Q 99

2001a 1Q 124
2001a 2Q 107
2001a 3Q 107
2001a 4Q 110

Quarterly Revenue Growth: Year over Year
1998 - 1999 1Q 206.8%
1998 - 1999 2Q 58.3%
1998 - 1999 3Q -5.8%
1998 - 1999 4Q -5.8%
1999 - 2000 1Q -4.9%
1999 - 2000 2Q 12.4%
1999 - 2000 3Q 17.9%
1999 - 2000 4Q -6.4%
2000 - 2001 1Q 17.4%
2000 - 2001 2Q -13.6%
2000 - 2001 3Q -13.7%
2000 - 2001 4Q 11.6%
II. ENTERPRISE VALUATION

Cash/ST Investments 2.43
ST Debt 2.10
LT Debt 145.93
Preferred/Other 0.00
Net Debt 145.6
Market Cap 238.7
Total Ent. Value 384.3

EBITDA(MM)

2001 52.2
2002E 46.1
2003E 54.7

TEV/EBITDA

2001 7.4
2002E 8.3
2003E 7.0

EBITDA multiple sensitivity to 1 pt. Multiple change $0.68
as % of stock price 3.1%

Full Year 2001 EBITDA
Net Income 17.0
Taxes 10.0
Tax Rate 37.0%
Interest expense (income)15.3
D&A 10.0
EBITDA 52.2

Full Year 2002 EBITDA Estimate
Net Income 14.8
Taxes 8.7
Tax Rate 37.0%
Interest expense (income)12.5
D&A 10.0
EBITDA 46.1

Full Year 2003 EBITDA Estimate
Net Income 20.6
Taxes 12.1
Tax Rate 37.0%
Interest expense (income)12.0
D&A 10.0
EBITDA 54.7

Catalyst

Now that two firms have picked up coverage of this company, the attention and focus may lead to the company trading more in line with its prospects. The signing of a distribution deal with Target could also spark a move in the company's stock.