Swimwear Maker Hurt by Customer’s Bankruptcy

Authentic Fitness Corp., the Van Nuys maker of such popular swimwear brands as Speedo, Catalina and Cole of California, seemed to roll up another strong financial performance in its fiscal third quarter that ended March 30. Its earnings, excluding a one-time charge, jumped 30% from a year earlier, to a record $7.8 million, and its quarterly revenue jumped 32% to a record $74.8 million.

But Authentic Fitness’ stock has declined 23% in the past 2 1/2 weeks, to $19.50 a share, and the reason is because one of the swimwear maker’s biggest customers, Herman’s Sporting Goods, filed for Chapter 11 bankruptcy protection April 26 and a few days later announced plans to liquidate.

Facing the likelihood that its Herman’s bills would go unpaid, Authentic Fitness bit the bullet and took a $7.2-million charge against its third-quarter earnings. As a result, the company reported an overall net loss for the quarter of $750,000.

This is a common problem among suppliers in any trade who depend on the financial health of their customers. But it’s a particularly frequent affliction in the battered apparel business lately, as retailers slog through anemic consumer demand for their goods and continue to undergo consolidations and bankruptcies.

“Anybody who has many of its eggs in one basket is vulnerable,” said analyst Laurence C. Leeds at Buckingham Research Group in New York.

“However,” Leeds said, “this is a short-term problem, not a long-term problem.”

The damage to Authentic Fitness over the long run will be limited, Leeds said, largely because of the strategy the company undertook in 1992 to become a sizable retailer in its own right. It now has 100 Speedo Authentic Fitness stores in malls across the country, which sell a broad selection of the company’s swimsuits, exercise garb and accessories.

Authentic Fitness Chief Executive Linda Wachner said the company plans to accelerate the opening of additional locations.

“Our strategy to open Authentic Fitness retail stores is proving to be a major advantage to our company, since the current weak environment for sporting goods stores continues,” Wachner said.

But Walter F. Loeb, a New York-based retail consultant, warned that when a company loses a big supplier, it’s very tough to replace that business. Opening more Speedo Authentic Fitness stores will help, he said, but “they need someone else. They need a sports retailer.”

Aside from the one-time charges, Wachner said the company continues to gain momentum in its swimwear and active wear lines. And she noted that Speedo should receive some valuable exposure this summer during the Olympic Games in Atlanta, where it will be the brand worn by the U.S. swimmers.