In its continuing efforts to morph itself from a manufacturing-based company into a marketing company, Russell Corporation made additional moves last week to bring in some horsepower to enable Jon Letzler to focus on building the brands that will be so critical to Russell’s future. The company’s businesses were divided into two divisions.

In a move announced last week, the company named Julio Barea as corporate SVP and CEO of the newly created Activewear Group, while Letzler will run the company’s new Athletic Group as CEO of that unit. Barea will report to Letzler in his current role as president & COO of the corporation. Essentially, the two divisions are meant to “differentiate the operations between products that are more branded and athletic focused and those that are more cost sensitive”, said Jack Ward, RML chairman & CEO.

These moves are expected to provide the company with more focus on specific missions critical to their future health, while other developments are expected to cut costs so the company can capitalize on those missions. Russell is calling it an Operational Improvement Program that is expected to target $50 million in pre-tax cost reductions to offset anticipated price decreases. The initiative is expected to streamline processes in both the manufacturing and administrative areas of the company.

One element of the program, to be completed by year-end, will see 10% — 100 to 110 positions — cut from the ranks of the salaried and administrative office staff. The move is expected to result in annualized pre-tax savings of $8 million to $10 million. The company expensed in the third quarter $900,000 of the estimated $3.0 million in costs associated with the move. The balance ($2.1 million) will be incurred in the fourth quarter of this year.

Another element of the program will see Russell construct a new textile plant employing 700 people in Honduras that is expected to increase production for both tee shirts and fleece programs related to the needs of the new Activewear Group. It will support Russell’s four sewing plants and 4,000 employees already in Honduras. The facility is expected to be fully operational in 2006, delivering $15 million to $20 million in annual pre-tax savings from Phase I of the new plant.

The addition of the facility is seen as critical as Russell attempts to compete in the increasingly price-competitive blanks business against arch-rival Gildan. Gildan, which has put market share pressure on RML with its moves, has recently closed some facilities in Canada while focusing more production in Honduras. GIL said Q3 sales would have even been higher if not for issues related to the ramp up of its new facility.

Looking at the third quarter, sales for the Russell Athletic division were impacted to the positive by the Spalding and Bike Athletic acquisitions. Excluding the acquisitions, sales were said to be down “less than $3 million, or about 3.0%”, which was equally divided between retail and team. Gross margin for the company, which was down 210 bass points from last year, was positively impacted by Spalding and Bike as well.

The International segment saw 40% of its increase come from the weaker dollar and positive foreign exchange rates. FX benefits added about $1.6 million to the top-line in the quarter.

The organizational changes and the new facility are sorely needed as these increases in other parts of the business were “more than offset” by the challenges of the Artwear/Careerwear division. Russell saw both lower unit volumes and lower average selling prices, due primarily to higher inventories in the market that were sold off at lower prices by the competition. The merger during the quarter of the company’s two largest Artwear channel customers also impacted sales as the merged entity moved to pare inventories.

Ward was challenged by one analyst on the reasons to continue in the Artwear end of the business, due to its ever-tightening margins and lower prices. Ward responded that it was a “very attractive” business that has been “one of our solid, most profitable” businesses, pointing to its double-digit EBIT over the years.

RML is forecasting Q4 sales in the $325 million to $345 million range, an increase of 7% to 12% versus last year. Earnings are expected to be in the 41 cents to 49 cents per share range, in line with analysts estimates.


>>> This is a company that is sorely in need of a non-commodity brand program. They find themselves fighting against private label and non-branded products in both their Russell and Bike programs…