Farah Incorporated

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Farah Incorporated

8889 Gateway West
El Paso, Texas 79925-6584
U.S.A.
(915) 496-7000
Fax: (915) 496-7188
Web site: http://www.savane.com
Public Company
Incorporated: 1947 as Farah Manufacturing Co., Inc.
Employees: 3,950
Sales: $273.7 million (1997)
Stock Exchanges: New York
Ticker Symbol: FRA
SICs: 2321 Men’s & Boys’ Shirts; 2325 Men’s & Boys’ Trousers & Slacks; 2331 Women’s, Misses & Juniors’ Blouses & Shirts; 2337 Women’s, Misses & Juniors’ Suits, Skirts & Coats; 5699 Miscellaneous Apparel & Accessory Stores

Farah Incorporated is a leading manufacturer and marketer of medium-priced men’s and boys’ apparel, with a particular emphasis on casual and dress slacks but also production of shirts, shorts, sports coats, and suit separates (matching slacks and sports coats). It also introduced a line of women’s shirts, skirts, shorts, and slacks in 1996. In addition, the company has factory outlet stores that market its excess or slow-moving products as well as apparel from third-party vendors.

Early Development and Growth: 1920-71

Mansour Farah, a Lebanese immigrant, came to El Paso, Texas, from Canada as a hay and dry-goods merchant. He and his wife, Hana, started making shirts in 1920 and expanded their line in the 1930s to bib overalls, denim pants, and similar work clothes. James Farah, the elder son, took over the administrative duties of the operation upon Mansour’s death in 1937, while younger son William took charge of production. Sales increased every year from the company’s incorporation in 1947 as Farah grew from an anonymous contractor to the military and big mail-order chains to a brand-name manufacturer and wholesaler. In the early 1960s the brothers developed their signature product—inexpensive, durable, permanently pressed slacks.

After James Farah died in 1964, William took over the helm. At this time, The company was making dress slacks for men and boys sold exclusively under the Farah label. In fiscal 1962 the company had net income of $1.5 million on net sales of $26.7 million. Under William Farah’s direction it grew rapidly, and in 1967, the year the company went public, raising $5.9 million, it had net sales of $73.9 million and net income of nearly $4 million. The Farah family and relatives retained about 56 percent of the outstanding common stock.

All of Farah’s products in 1968 were being designed in-house and manufactured in four highly automated production facilities in El Paso and San Antonio. Fabrics procured from domestic textile manufacturers were cut into components using patterns prepared by the company. Sewing-machine operators assembled the components and affixed items such as zippers, pockets, and trim. The clothing was then pressed and heat-treated, emerging wrinkle-free with permanently pressed creases. Farah’s own trucks delivered the goods to about 150 independent contractors and returned to the plant with materials from textile mills. The contractors were selling Farah slacks and jeans to more than 9,000 department and specialty stores throughout the country.

By offering a quality product in mass volume at very competitive prices, Farah continued to grow rapidly and by 1972 was the world’s largest manufacturer of men’s and boys’ slacks, turning out 30 million pairs a year. Sales reached $164.5 million in fiscal 1971 although profits slumped from the record $8.3 million the previous year as the company was caught off-guard by a shift in fashion from woven to knit fabrics. William Farah, a hands-on manager who invented a machine that could sew zippers, pockets, and belt loops and another that could press a jacket shoulder with one movement, often rode a bicycle through the aisles of his sewing rooms, monitoring productivity. A factory in Belgium was opened in 1971, bringing the company total to 11.

The Turbulent and Unprofitable 1970s

The company’s growth came to a halt in the spring of 1972, when at least 2,000 workers in Farah’s seven plants, most of them Mexican-Americans, went out on strike, seeking higher wages, greater job security, and the right to be represented by the Amalgamated Clothing Workers of America. In July 1972 the AFL-CIO authorized a nationwide boycott of all Farah products, only the third time in its history that the labor federation had initiated such an effort. The strike also had the backing of El Paso’s Roman Catholic bishop and Senator George McGovern, the Democratic Party’s presidential candidate. In many ways Farah was a paternalistic employer, paying typical wages for semi-skilled work in the El Paso area, treating plant workers in company medical clinics, subsidizing hot lunches, and transporting them to work in company buses, but its hiring and promotion policies were arbitrary, and a number of union supporters were fired.

In fiscal 1972 Farah’s sales slumped by $8 million and it lost $8.3 million because of a $20.8 million writedown of unsold inventory. Farah’s stock price dropped from a high of $49.25 a share in 1971 to $3.38 a share at the end of 1973. The company earned a meager $43,000 in net income on sales of $132 million in fiscal 1973 and closed four of its plants late in the calendar year. Moreover, the company’s dividend was suspended and not resumed until 1983. In February 1974 a settlement was reached whereby Farah agreed to recognize the union as its workers’ bargaining agent and to rehire the 2,000 remaining strikers “as needed.” The company and the union agreed on a three-year contract with pay raises and an improvement in fringe benefits.

But Farah’s troubles were just beginning. The company made its first real profit in four years in fiscal 1975 by committing more than a quarter of its production to leisure suits. When that market collapsed in 1976, however, Farah missed the shift to demand for jeans and lost $24.4 million on sales of only $137.3 million in the fiscal year. The company had to reduce the number of its domestic plants to three and cut its labor force to only 4,000. Farah’s bank creditors sought and obtained William Farah’s resignation as president and chief executive officer. He remained chairman, however, and in March 1977 pushed out his successor. This action angered the bankers, who accepted the new management team but forced Farah to resign as chairman and CEO.

Farah’s new president refinanced the company’s bank loans and closed five plants during 1976-77, including the two-year-old El Paso fabric plant, the remaining San Antonio facility, and the Belgian factory. Nevertheless, Farah lost another $17.8 million in fiscal 1977. William Farah, in April 1978, again used his control of about 40 percent of the company stock to overturn its management, firing not only the president and seven vice-presidents but also their secretaries, directing armed guards to escort all of them off company property. He resumed his position as CEO, refinanced bank loans through a new lineup of lenders, and brought out a line of coordinate jackets to supplement the company’s slacks, jeans, and walking shorts. In fiscal 1979 Farah, after three losing years, was profitable again.

More Turmoil, More Red Ink in the 1980s

The following year Farah introduced a women’s line of casual slacks and jackets (dropped in 1987) and an upscale W.F.F. designer line featuring an $85 suede jacket. In 1981 the company opened two new plants in Ireland, soon thereafter establishing facilities in Costa Rica and Mexico. During fiscal 1982 Farah began manufacturing and marketing, under license, men’s slacks, jeans, shorts, blazers, and sports coats and jackets bearing the John Henry label. For fiscal 1983 the company reported record net income of $21 million on sales of $206 million.

This period of peace and prosperity was not to last, however. William Farah’s relations with company president Ray W. Williams deteriorated in 1984, because Farah wanted to deviate from its traditional market and concentrate its sales on upper-tier specialty stores. Accordingly, the company purchased Generra Sportswear and introduced four new fashion-oriented labels. Williams, who had been credited with the company’s resurgence, resigned and was succeeded by Farah’s son Jimmy. However, Jimmy also opposed his father’s drive for higher output, which included introduction of the E. Joven, N.P.W., and Savane labels. By 1987, the year the company’s name was shortened to Farah Incorporated, Jimmy Farah and his two brothers had been forced out of their positions.

Once again, Farah fell into deep trouble. In his drive for further growth, William Farah had allowed product quality to slip, shipments to fall behind schedule, and inventories to grow out of control. The company had record sales of $386.1 million in 1986, when it paid its last dividend, but net income was only $4.1 million. It lost money for the next six years, the worst of which was 1989, when it finished $13.7 million in the red and, in order to avoid bankruptcy, sold Generra Sportswear for less than it had paid. Sales dropped to only $139.6 million in 1990, compared to $339.2 million in 1988. William Farah accepted a payment to resign as president and chief executive officer in June 1989 and was succeeded by Richard C. Allender.

Predictably, however, Farah was soon at odds with the new managers, who ousted him as chairman of the board in 1990. In a lawsuit, the company asked court permission to prevent its former leader, who retained an office at headquarters, from “interfering in the day-to-day management of the company” and added that the present board believed he “bears substantial responsibility” for $40.7 million in cumulative operative losses by its domestic unit since 1985. In a 1990 settlement Farah, who still held 15 percent of the company’s common stock, agreed to stop criticizing the company and to stay off its property without authorization. In return, the company extended a financial settlement that allowed him to avoid personal bankruptcy. Farah sold his stake in the company in 1992.

Repositioning the Company in the 1990s

In order to return to solvency, Farah cut back on operations and expenses, secured $32 million in new bank financing, and established a chain of factory outlet stores called Value Slacks, mainly to sell its excess Farah U.S.A. products. The company earned a razor-thin profit of $132,000 in 1993. Marciano Investments, Inc., an investment group representing two of the brothers who owned the jeansmaker Guess, Inc., took a 37 percent stake in the company during this period, reaping big capital gains in 1994 after Farah continued its resurgence with a new all-cotton, wrinkle-free line of the Savane shorts and casual slacks that it had introduced in 1989. The company also licensed its wrinkle-free processes to Oxford Industries Inc. for its shirts in 1994 and earned $10.8 million that year.

In 1995 Farah opened an 85,000-square-foot finishing plant at the Piedras Negras, Mexico, complex where the company had, since 1979, established four sewing plants. The new facility featured a laundry system designed to wash and dry 25,000 pairs of pants in each eight- or nine-hour shift as part of Farah’s Process 2000, the company’s treatment to generate soft, wrinkle-resistant, and shrink-resistant apparel. A similar operation opened in Costa Rica the same year for sports coat production, and a new cutting room and distribution center was established in El Paso.

By this time, however, the company was back in the red, having lost its hold on the wrinkle-free slacks market to such aggressive competitors as Haggar Corp. and Levi Strauss & Co.’s Dockers line. The company lost $12.9 million in fiscal 1995. Accordingly, Farah sold its Costa Rica facility in 1995 and the Piedras Negras complex for about $22.3 million in 1996. During 1997 the company closed one of its Irish manufacturing facilities and sold the other one. It was planning to close or sell its finishing facility in Cartago, Costa Rica, during fiscal 1998 and to reduce production significantly at its remaining Costa Rican manufacturing plant. The company also was significantly reducing its U.S. production work force as it shifted all sewing and finishing processes to independent contractors abroad to take advantage of lower costs.

Farah also cut back on its Value Slacks stores. By the end of fiscal 1995 all the Puerto Rican stores were closed, with the remaining 36 all in the mainland United States. Because of competition from discount retailers and other men’s apparel manufacturers in this market, Farah in 1996 began to shift its retail focus to offer a line of first-quality products. Accordingly, Value Slacks was renamed Savane Direct and given a more fashionable appearance with upscale fixturing and displays.

Farah USA broke into the women’s market in 1996 with two styles of cotton twill pants and one style of shorts for women in black, natural, and khaki. This merchandise carried the Savane label. This Farah division, however, mainly saw its future in wrinkle-free private-label sales to such big retailers as Wal-Mart, The Gap, Dillard’s, and Federated Department Stores. Private label business was accounting for 22 percent of the company’s output.

A gain of $10 million from the sale of assets enabled Farah to report net income of $6.8 million in fiscal 1996 despite only a marginal increase in sales. Sales grew significantly in 1997, but despite a $5.1 million credit for termination of foreign operations, the company earned only $270,000. The company’s long-term debt was $13.8 million at the end of fiscal 1997.

Farah in 1997

As it approached a new century, Farah was selling men’s casual and dress slacks under the Farah label, with the dress products made from blended fabrics and the casual products mainly all-cotton. This label was repositioned in 1996 from department store sales to marketing through a single mass-market distributor. The Savane label was for men’s and boys’ casual pants and shorts in cotton and a cotton-lycra blend; men’s cotton and polyester/cotton shirts; men’s dress slacks, coats, and suit separates, mainly in blends of polyester/wool and polyester/wool/lycra; and women’s casual cotton slacks, shorts, shirts, and skirts. Savane-label goods were being sold primarily in department stores. The John Henry label was primarily for dress slacks, suit separates, and sports coats produced from blended fabrics and was being sold to Sears. Farah also was producing casual and dress wear, women’s wear, and boys’ clothing for various retailers under their own labels.

Although Farah U.S.A. was shifting its production activities from company-owned facilities to third-party contractors, it was still, in 1997, operating a cutting facility in El Paso and sewing and finishing services in Chihuahua and Ciudad Juarez, Mexico, and San Jose and Cartago, Costa Rica. This division’s distribution center was in El Paso. Farah International was selling apparel primarily in the United Kingdom, Australia, and New Zealand. With the termination of manufacturing operations in Ireland, this division entered into an agreement with the new owners for supplying the United Kingdom’s needs. Two factories in Fiji in which Farah had a half-interest were supplying the Australian and New Zealand markets. In fiscal 1997 Farah U.S.A. accounted for 76 percent of company sales, Farah International for 18 percent, and Savane Direct for six percent.