Springs Global Outlines Future Growth Plans

Brent Felgner, August 20, 2007

With its public offering here complete and with Springs Industries and Coteminas under the singular control of its Brazilian management, Springs Global is enduring what it hopes will be short-term pain as it rushes toward establishing worldwide footprint.

It is a strategy that will see Springs Global withdraw all manufacturing from the United States by year end, open up new retail markets in Europe and Asia, attempt to grow its brand presence among more retailers and broaden its manufacturing base in Asia. Very few parts of the business will be left untouched.

It will be costly.

For its second quarter, Springs Global reported a 22.1 percent drop in sales — 23.4 percent in the United States —R$650.6 million reais, compared to R$849.7 last year. Worse, losses deepened, to R$99.8 million.

During the company's second-quarter conference call last week, chairman and ceo Josue Gomes da Silva explained that much of the sales decline resulted from the loss of production capacity as U.S. plants were shuttered, packed up and shipped to Argentina and Brazil to be re-established.

The company has also taken charges against the net.

That should begin to resolve soon, said Gomes da Silva and cfo Flavio Barbosa.

"By the end of this year all the transition in our manufacturing footprint will be completed," Gomes da Silva said. "We expect that to normalize in the first quarter of next year."

In addition to the withdrawal of manufacturing from the U.S., Springs' long-term strategy includes:

  • Realization of greater SG&A efficiencies;

  • A continued focus on core markets, and the branding, innovation and design aspects of its business;

  • Entry into European and Asian markets through "strategic alliances" and acquisitions;

  • Establishment of a manufacturing facility in Asia and an expansion of its existing arrangements; and

  • A "consolidation" of warehousing and distribution in the United States.

Springs Global's U.S. sales are concentrated among three primary accounts, according to the company's prospectus: About two-thirds of sales is spread among Wal-Mart, Target and Bed Bath & Beyond, the company reported.

"It is true that we are very concentrated with a few retail customers, and that is a reflection of the structure of the U.S. retail business," Gomes da Silva said. "I think that the strength that we have, which is to be the No. 1 supplier of our product categories in the major retailers in the U.S., Canada, Argentina and Brazil, is unfortunately also one of our weaknesses in the very large concentration in very few customers. We do not want to lose the share we have in these retailers.

But even for Wal-Mart, it's good that we grow elsewhere. It's good that we grow in Europe, for example, and therefore their participation in our total business falls a little bit."

Hence the company will seek a broader retail presence in Europe and Asia.

Gomes da Silva also said that he believes Springs can reverse the trend away from national brands to store brands.

"It is true that retailers have gone in the direction of having their own private label brands. And today, 44% of our sales are through private labels. We have 56% of our sales in our own brands and in licensed brands. We believe that these numbers should go up to 70%. It is our strategy to invest in our brands and licensed brands so that the 56 percent goes up to 70%.

And Gomes da Silva stated that he is prepared to invest the company's resources in development.

"We believe that we have the ability to create new brands and that the retailers find it attractive to rely on brands that are important," Gomes da Silva added. "Our Serta brand is very important in the retail channel at Bed Bath and Beyond, Linens 'n Things. We have also the Court of Versailles — that's a very important brand at department stores."

He said the Springmaid luxury program at Wal-Mart has become an important adjunct to the business and has helped attract more affluent customers to the store.

"We believe that Springs Global is the only company that has brands spread throughout the whole price point spectrum, from low to high, and we are positioning ourselves to have even more influence on that," he said.

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