Rocky Road Ahead for Blue Holdings

The business fortunes of Blue Holdings have taken a swift turn for the worse—illustrating the challenges of navigating a maturing premium denim market.

NEW YORK — A year and a half ago, Paul Guez, chairman of Blue Holdings, was riding the denim trend for all it was worth. His trendy Antik Denim and Taverniti So brands were in high demand, he announced plans to acquire the 24-door Up Against The Wall retail chain and promised to nearly triple its size, and he celebrated the company’s listing on the Nasdaq exchange by ringing the opening bell at its headquarters in Times Square.

Since then, however, the business fortunes of L.A.-based Blue Holdings have taken a swift turn for the worse—illustrating the challenges of navigating a maturing premium denim market in which a few top brands have consolidated their positions. Blue Holdings’ deal for Up Against The Wall fell apart as the denim maker could not raise financing. More urgently, Blue Holdings’ sales and earnings—along with its stock price—have tumbled badly in the past year, due to poor product assortments, late deliveries and cleaner jeans trends that overtook Antik Denim’s heavily embellished styles.

For the first nine months of this year, Blue Holdings’ sales slid to $26.3 million, down from $41.6 million in the year-ago period. The company posted a net loss of $3.8 million in the first nine months of this year, compared to net income of $2 million in the same 2006 period.

For the most recent third quarter, ended Sept. 30, the company lost $3.9 million, compared to a loss of $420,860 in the year-ago quarter, as net sales declined 35 percent to $9.5 million.

Since 2006, share prices in Blue Holdings have crumbled from over $6 to about 67 cents last Thursday. Last week, Nasdaq sent the company a warning that it will be delisted unless it can get its stock price above $1 for 10 consecutive trading days.

“The fundamental issue is the company tried to do too much—run three brands, retail stores, line extensions—without the management depth or systems to handle this complex of a task,” said Eric Beder, senior vice-president at investment bank Brean Murray, Carret & Co. “As such, operationally the company imploded, and management is still picking up the pieces and fixing the basic model.”

Asked what Blue Holdings’ prospects may be against larger, better-financed and more recognizable brands like VF Corp.’s 7 For All Mankind, True Religion Apparel, Rock & Republic, Levi’s Capital E and Citizens of Humanity, Beder noted: “We believe Blue Holdings has some unique brands that still have a following. There is room for the company in the marketplace, but the window is closing. Management has to stabilize the company and set the stage for survival first, and then growth. Blue Holdings is in a life-and-death struggle.”

Company founder Guez clearly recognized that fact when he stepped down from the CEO position in July and brought in Glenn Palmer to fill that role. Palmer was previously CEO and president of Rafaella Apparel Group (owned by Cerberus Capital Management), and prior to that held the same position at outerwear maker Amerex Group.

“We like Glenn a lot. He has turnaround experience and he is a very bottom-line, no-nonsense kind of guy. If anyone can turn this company, he can,” said Beder.

To increase sales, Palmer has decided to focus on growing Antik Denim—Blue Holdings’ largest business—in the department store channel, rather than in the brand’s customary high-end specialty store base. For spring ’08, Antik Denim will begin selling at Macy’s East and Dillard’s doors for the first time. Palmer believes the Macy’s business will reach $5 million within a year. The jeans will be priced from $158 to $198 at retail, down from the $200 to over $300 that were the former retail prices.

“The whole premium market has come down, and you need to be priced according to the market you’re retailing in,” pointed out Palmer.

While the move may alienate tastemaking specialty boutiques, Beder believes it’s a smart initiative considering Blue Holdings’ financial position. “Right now is not the time for management to overlook any potential revenue-generating opportunities,” he said.

Additionally, Palmer is refocusing Antik Denim and Taverniti So on core products and moving away from the fashion-heavy looks the brands were known for. The company is also implementing EDI replenishment systems for its core styles at department stores.

“The denim market became cluttered with a lot of players, and the ones that are succeeding are ones with established core businesses, rather than the pure fashion players,” said Palmer. “Retailers have viewed Antik and Taverniti as fashion, and now we have to build our core offerings.” To that same end, Blue Holdings is relaunching its Yanuk brand as a non-premium denim and sportswear range for fall ’08, with retail prices ranging from $89 to $125. The company hopes to reach sales of $3 million to $4 million in the first season.

The company’s overseas sales have mirrored weakness domestically, with international sales contributing 20.9 percent of revenue in the first three quarters of 2007, versus 30 percent a year ago. To jump-start that business, the company recently signed a new three-year Canada license for Antik Denim, is in negotiations for a Japan license for Yanuk, and is close to announcing deals for Taverniti So in England, the Far East and the Middle East, according to Palmer.

To cut costs, Blue Holdings has eliminated $2.4 million in annual payroll expenses, or over 35 jobs, since Palmer joined the company. “The cuts came from across the company. We are right-sizing; there was a lot of fat,” he noted bluntly.

One person to exit was Scott Drake, president of sales and COO, who left the company on Sept. 28, after just six months on the job. Drake is a 25-year veteran of the apparel industry, previously holding top positions with denim makers Blue Pen Inc. and Visual Concept Image.

The company also shuttered its nascent Life & Death brand and is reexamining its deal to launch a label with Will.i.am of the music group Black Eyed Peas. However, the company has still not decided whether or not to close its two freestanding stores in L.A. and San Francisco, as it previously announced it would.

To increase cash liquidity, Palmer is reducing the company’s fabric inventory by 200,000 yards and its finished-goods inventory by up to 110,000 units. This should generate about $2.5 million in cash. During the past quarter, about 27 percent of sales were sold at steep markdowns to off-price channels in a strategic effort to clean out inventory, which caused gross profit margins to decline to 10 percent, down from 30 percent in the year-ago quarter. Going forward, the company hopes margins will reach 50 percent or more.

Despite the daunting challenges facing Blue Holdings, Palmer is confident the company can regain its footing. Its top-priced Taverniti So line continues to sell well at retailers like Saks Fifth Avenue, Neiman Marcus, H. Lorenzo and Atrium, he noted.

“2007 is a transitional year,” he added. “We have streamlined the business around our core brands and positioned the company for sustainable growth.”

For the current fourth quarter, Blue Holdings expects to break even on sales of $7.5 million and is forecasting a return to profitability in the first quarter of 2008.

Beder even has a “buy” rating on the stock, with a $2 price target. “The stock is essentially a lottery ticket at under $1,” he explained. “We believe any type of positive momentum would be enough to drive the shares upward.”