Springs Looks Ahead

Sao Paulo, Brazil—To say that Springs Global chairman and ceo Josue Gomes da Silva's plate is full as he transforms the giant mill simply misses the point.

Springs Global's continuing challenges — on its financial statements and on store shelves— will give way to renewed growth and profitability in 2008, Gomes da Silva promises. By that time most manufacturing will have moved out of the United States, the company's manufacturing capacity will be solidly ensconced in South America, as it moves even closer to a footprint in Asia, its outlet stores will have closed and its marketing focus — its view of itself — will have transformed to that of brand builder and consumer goods marketer.

What's more, it all must happen as the company continues its cultural transition to Brazil and, to varying extents, Argentina and Mexico, all in the name of wrestling down fixed costs.

That's not all. Gomes da Silva simultaneously tantalizes that outlook with hints of a mill deal pending in Europe and a possible move into Vietnam. If it happens, it will represent a massive turnaround for the old mill.

To be sure, these rosy predictions stand in stark contrast to the company's just reported third-quarter results, which saw sales decline nearly 26% and net losses more than double

For the quarter ending Sept. 30, Springs' net loss more than doubled to R$104.3 million, from R$49.5 million during the year-earlier period. Based on the average three-month Brazilian Real-to-U.S. Dollar exchange rate during the 2007 quarter, which the company calculated at 1.8928, the loss translates to US$55.1 million, compared to US$22.9 million last year, when the dollar yielded an average 2.1631 conversion. Year-over-year comparisons in U.S. dollars are no longer particularly relevant.

Net sales declined 25.6% on a constant basis, net of currency fluctuations in the quarter, to R$903 million — US$477.1 million — compared to R$1.215 billion during the same period last year, US$561.7 million.

"We are very confident that next year we will have very good profitability, still shy of where we'd like to be and certainly there are improvements to come," offered Gomes da Silva in a telephone interview. "But in the first quarter, profitability out of this mess into a more focused company with the plants where they need to be."

Springs is also involved in a continuing major refocusing effort, concentrating on three core areas. So far it has sold its creative products business, its bedding for babies division to Crown Crafts, as well as its juvenile business. Its retail stores are next to be shed.

"We are not retailers, we don't know how to be retailers," he said. "In the past you might have been justified to have had these outlets, but today you have specialized stores to sell these products

"So this is a major refocusing of the company that affects these numbers because obviously when you go out of these businesses it's always with some kind of accounting loss — not a cash loss but an accounting loss," Gomes da Silva explained.

All of that said, the effort will be worth little unless Springs can reinvigorate and diversify its retail relationships. Wal-Mart remains its dominant customer and its top 10 retailers still account for about two-thirds of its sales.

But on the plus side, Gomes da Silva said that the speed of the effort has picked up markedly from last November, when the Brazilian parent assumed full control.

"I think that in the first nine months or 10 months there were some accommodations. We are not the type of people that come and just destroy everything that was in place to build something new. We respect the past. So the first eight or nine months were more discussions, and convincing and things like that.

"So maybe we were a little too optimistic," he admitted. "But you're talking about moving 1,357 looms, with all the spinning equivalent, with the finishing equivalent with all the cut-and-sew equivalent. It is a huge effort."

That said, Springs will be aimed at becoming a truly global entity, Gomes da Silva insists. While retail sales in the United States accounted for 78% of its business in 2006, they will account for less than 60% by the end of 2008.