The Gitano Group, Inc.

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The Gitano Group, Inc.

1411 N. Broadway
New York, New York 10018
U.S.A.
(212) 819-0707
Fax: (212) 730-0319

Public Company
Incorporated: 1987 as Gitano, Inc.
Employees: 3,200
Sales: $826.5 million
Stock Exchanges: New York
SICs: 2331 Women’s/Misses’ Blouses & Shirts; 2321 Men’s/ Boys’ Shirts; 2325 Men’s/Boys’ Trousers & Slacks; 5621 Women’s Clothing Stores

The Gitano Group, Inc., is one of the United States’ largest apparel merchandisers. Its ability to give its discount-priced clothing a high-fashion image brought the young company tremendous growth and widespread name recognition during the 1980s. Gitano’s roots lay in Orit Corp., a wholesale general merchandiser founded in 1971 by Morris Dabah, an Israeli immigrant. The business struggled, and three years later the elder Dabah was joined by his oldest son, Haim, who gave up his own career to help his father.

By 1976 the focus of Orit Corp. had become apparel, and Haim Dabah, along with brothers Ezra and Isaac, had introduced the Gitano brand of jeanswear, which would prove to be the basis of the family’s fortune. Haim Dabah gave the Gitano label an image of youthful sexiness that upscale brands like Calvin Klein and Ralph Lauren were successfully merchandising. Spending millions on advertising using high-fashion imagery and styling while distributing to such mass merchandisers as Wal-Mart and K-Mart, the Dabahs saw Gitano brand sales grow steadily. By 1980 revenue had reached $30 million annually. Using South American and Asian manufacturers that were guaranteed minimum production levels, the Dabahs were able to keep prices low and provide discounters with fashionable yet budget-priced apparel. Haim was in control of Gitano’s high-profile marketing strategy, while Isaac oversaw production decisions.

Throughout the 1980s Gitano was able to ride the wave of designer-brand popularity by dominating the niche of bargain-priced jeanswear. Distribution was focused on the mass merchandisers, but the Gitano brand proved so popular that department stores such as Macy’s carried the line. The company was feeling confident enough to step boldly into the menswear arena in 1987 with lofty sales goals. Gitano sought to use the same tactics that had brought it such stunning success in women’s wear: namely, by heavily promoting an affordably priced brand name while seeking to distribute at all retail levels.

In September of 1988 Gitano went public under its new name, The Gitano Group, Inc. (it had been incorporated in 1987 as Gitano, Inc., to serve as a holding company for Orit Corp.), with an offering of two million shares and raised $38.3 million. The Dabah family remained in control with a 70 percent stake. A second offering was held in June of 1990 and amassed $56.6 million. The funds were used to pay off debt and to fuel an ambitious expansion program. A big step was Gitano’s decision to move into the retail side of the business by opening its own series of stores. Originally seen as an outlet for selling off excess inventory, the Gitano stores soon became full-fledged retailers with their own cadre of designers and buyers.

In December of 1988 Gitano bought the rights to the Gloria Vanderbilt trademarks from Murjani Worldwide B.V. for $15 million in cash. The struggling Gloria Vanderbilt brand, which had hit hard times early in the 1980s, was given an image make over as Gitano sought to expand the line’s appeal to younger women. Although another company held onto certain license rights for the Gloria Vanderbilt name, thus restricting Gitano’s control over the brand’s image, the line proved to be a success in such mid-priced retail stores as Macy’s and Nordstrom.

In October of 1989 Gitano acquired 50 percent of the common stock of Regatta Sport, Ltd., and a year later it acquired the remaining 50 percent. Another acquisition in 1990 was its licensee the Accessory Network Group, Inc. Gitano took these bold steps to expand just as the apparel market began to slow in 1989. As the economy stalled, Gitano saw its profits shrink even as sales grew. Haim Dabah, who had created Gitano’s public image and overseen its highly effective marketing strategy, struggled in his role as president with financial planning and budgetary controls. Analysts pointed toward a loose management structure, which often seemed to foster internal competition.

Ill-conceived expansion saw the Gitano stores grow to more than 100 by 1991, even as the country suffered the effects of recession. The costs associated with these stores contributed to the growth of administrative expenses by 20 percent in 1990. As a result, the stores did not turn a profit. The company’s manufacturing facilities—in Mississippi, Jamaica, and Guatemala—suffered from the same lax management and poor oversight, and they produced waste rates much higher than the industry average.

The recession only highlighted and compounded Gitano’s problems. Many small retailers that had been Gitano customers went out of business, and more people were shopping at mass merchandisers, where the margins are razor thin. In 1990 earnings plummeted 73.8 percent, even though sales climbed 29 percent over the previous year to $806 million. Late in the year Haim Dabah undertook a major reorganization program; Gitano wanted to return its focus to jeanswear while improving quality and streamlining the production process. To do this, the company made an effort to customize service to its retailers, focusing particularly on the mass merchandisers that accounted for the bulk of Gitano sales—fully 90 percent—and paring down its customer list. To cut its inventory and thus avoid costly markdowns, Gitano shifted away from a system of producing apparel and then waiting for orders to a process whereby only goods that had been presold would be produced. Finally, Gitano started to exit from its retail business.

In 1991 Gitano felt the initial painful steps of downsizing—cutting its customer base from 3,600 to 1,200 and dumping $57 million worth of unwanted inventory—brought it reduced sales for the first time in its history. Gitano lost $62.5 million in 1991, and restructuring costs contributed $12.2 million. Sales dropped to $780.4 million. In June of 1992 Peter C. Kells, formerly an executive at Coca-Cola and Revlon, was brought in as chief financial officer. Gitano’s lenders responded positively and in July of that year the company was able to extend its credit line. Despite efforts to continue downsizing—the company’s manufacturing plant in Ruleville, Mississippi, was closed—Gitano’s finances continued to be precarious, and a $78 million restructuring charge against second quarter earnings triggered a default on its bank agreements. An announced $237.9 million loss for 1992 stunned Wall Street, especially as sales had topped the previous year’s by $46 million. Restructuring costs for the year came to $101.5 million.

The Dabah family’s financial plight was exacerbated by problems associated with the Children’s Place, a children’s apparel chain that the family bought in 1989. It was put under the control of Ezra Dabah, who also continued to steer the Gitano children’s wear division until 1991. Although separate from Gitano, the Children’s Place was a major Gitano customer and by July 1992 owed the company $27 million. The Dabah family was forced to funnel its own funds into the money-losing retailer as well as pledge Gitano stock as collateral to the chain’s lenders. As a result, the family’s stake in Gitano was reduced from 70 percent to 43 percent.

In August of 1992 Gitano announced that senior management was being reorganized. Haim Dabah became chief executive officer and Peter Kells was named chief operating officer; Morris Dabah, formerly chief executive officer and chairman, remained chairman. It was also announced that Gitano had received an extension of its credit and that certain debt covenants on which the company was in default were waived. Gitano hoped that these moves would emphasize its commitment to financial discipline. The company reported a loss of $97.8 million in the first nine months of the year.

In November of 1992 the Dabah family—Morris, Haim, Isaac, and Ezra—filed for bankruptcy; also named in the filing was the holding company that held the stock for the Children’s Place. The surprise move was prompted by one of its lenders selling off a block of Gitano stock that it had been holding as collateral. The family feared that sell-offs by other creditors would further depress Gitano stock and destabilize the restructuring process.

In February of 1993 Gitano sold its Accessory Network division to companies owned by the division’s president and vice-president; it was to continue on as a licensee of Gitano. Gitano hoped to realize $10.5 million in licensing proceeds; the nearly $15 million the sale raised was used to pay bank debt and as working capital. Also early in 1993, the company shuttered its Regatta Division but planned to continue to use or license the trademark.

Late in February of 1993 Haim Dabah was replaced as chairman and chief executive officer by Robert Gregory, Jr., an apparel executive who had previously served as president and chief operating officer of VF Corporation—maker of Lee and Wrangler jeans. Haim Dabah was to continue on as president and focus exclusively on Gitano’s marketing efforts, with which he had helped spur impressive early growth. Isaac Dabah was seen as being steered away from senior management, and Morris Dabah moved on to become chairman emeritus. It was simultaneously announced that Gitano had received a two-year extension on its credit lines. The company indicated that it was seeking to pare down to all but its essential operations, namely anything other than its Gitano or Gloria Vanderbilt clothing lines, both of which continued to be profitable. By mid-1993 all the Gitano stores had been closed, and its remaining plant in Mississippi was also shut down. Results for 1992 showed that dramatic steps would need to be taken; the net loss for the year was about $236 million, although sales were $46 million above those of 1991.

In a retail environment where attractive prices and timely fashions are just as important as a strong image, Gitano has sought to recreate itself so as to step firmly into the future. Analysts pointed to the company’s ever-increasing sales and the continued consumer appeal of Gitano jeans wear and the popularity of the Gloria Vanderbilt line as indicators of the strength and promise of The Gitano Group, Inc.’s core businesses; they saw a profitable future for the company as long as there was strict fiscal management. Robert Gregory, as quoted in Women’s Wear Daily, summed up Gitano’s situation as he stepped in to manage, “They had no operating systems in the company for things like forecasting, product planning, inventory control, quality control, and distribution. It’s impossible to manage a business without these controls.” He added, “They became overdiversified, uncoordinated, and eventually unprofitable. We’re trying to reduce the diversification and get down to a more manageable business … to bring some focus back to Gitano.”