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Business Background

In 1972, JAA commenced operations as a private company founded by three brothers (Emile, Robert, and Frank Bergand) in Chicago, Illinois. In 1988 the brothers decided to take the company public and launched an initial public offering (IPO), as market conditions at that time were quite favorable and the brothers wished to reap financial benefits (i.e., cash out) after years of hard work. The brothers remained with the company and served in executive roles until they retired in 2003. JAA is listed on major stock exchanges, is headquartered in Chicago, and has a December 31 year-end. The financial statements appear in Appendix A.

The company has three operating segments:

1. A U.S. wholesale business

2. A U.S. retail business

3. An international business (wholesale and retail)

The aforementioned segments reflect the way the business is managed and performance is evaluated. The wholesale business focuses on the sale of undecorated apparel products to distributors in the United States and internationally. The international wholesale operating segments also produce apparel products that satisfy the preferences of those customers that favor a more local traditional style, to stay sufficiently competitive in those markets. This was determined from a risk workshop that identified the loyalty factor of international customers as a major business opportunity.

The company operates 57 retail stores in 10 different countries:

• North America – United States (28)

• South America – Argentina and Brazil (7)

• Asia – China, South Korea, and Japan (11)

• Australia (4)

• Europe – Switzerland and Turkey (4)

• Africa – South Africa (3)

The retail stores cater directly to the consumer, and most such stores are situated in major shopping malls using leased space. The stores target middle-aged men and women. Retail store customers represent quite a sophisticated group of shoppers. The stores compete on the basis of location, merchandise availability, price, and customer service. Retail sales are promoted via major newspapers and online media. JAA's major competitors are McCory, Bertang, and Keramtor.

The wholesale customer base comprises 100 key distributors. The split between retail and wholesale is 40 percent/60 percent, respectively. Competition at both the retail and wholesale levels is fierce and has necessitated that the company outsource part of its manufacturing to lower-cost countries. Key product cost competition is from China, Bangladesh, and Vietnam.

The apparel business/industry is characterized by rapid movements in fashion, changing consumer demand, and significant competitive pressures. JAA has emphasized quality merchandise at an affordable price. Wholesale customers are secured through a lean, but stellar, sales force established in the major cities around the globe (45 major cities). No one single distributor exceeds 5 percent of the company's sales. JAA also has an online catalog operation, whose critical success factors are website availability and design, advertising response times, and social media recognition.

The Bergand brothers are now the largest company shareholders, owning some 22 percent of the stock. There are a couple of large institutional investors that collectively own an additional 12 percent of the outstanding shares.

The executive and senior management teams comprise:

• President and CEO Michael Menorix

• Chief Financial Officer Jillian Verdiger

• VP of Marketing and Sales Mary Mordensti

• VP of Production Boris Dentiger

• VP of Human Resources Francine Tanserki

• Chief Internal Auditor Matt Damison

• Chief Risk Officer Frank Gillespie

• VP of Legal and Compliance Michael Perstay

JAA has its core U.S. manufacturing in a 360,000-square-foot facility, which also contains the corporate/executive offices and warehousing/distribution. The company also has two small satellite manufacturing facilities in Tampa, Florida, and Los Angeles, California, on company-owned properties. JAA has outsourced 25 percent of production in various agreements with third parties in Turkey, China, and South Africa. The company's apparel product line initially focused on men's coats, but over a period of time expanded to include a full line of men's clothing inclusive of pants, shirts, and coats. In 1999, an upscale line of women's clothing was added to the product portfolio.

The company purchases all fabric from 50 key suppliers, having trimmed its supplier base from 400 over the past five years. All suppliers are ISO 9000 certified and, as such, are subject to rigorous reviews prior to becoming JAA's suppliers. JAA uses state-of-the-art technology to enhance marketplace competitiveness.

The company has been fortunate in attracting high-caliber employees. It has had minimal turnover over the past three years, and it provides a generous compensation and incentive package to its employees. It is not subject to any collective bargaining agreements but to various environmental regulations in the United States and overseas. One other key area JAA is heavily focused on, and in strong compliance with, is monitoring compliance at third-party manufacturing facilities overseas.

Effective management of risk was recognized by the current management team as being critical to JAA's success. Thus the company sought individuals who were experienced in this field for key leadership positions in Internal Audit and Risk Management, as well as for the key board positions. When the current heads of Internal Audit and Risk Management joined the company in 2008, JAA had sustained six years of losses. JAA's creditworthiness is currently BBB as rated by the major rating agencies, having improved from junk status to this rating within four years.

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