By Kellie Ell
with contributions from Luisa Zargani
 on March 7, 2019
Diesel jeans.

Don’t blame the denim market for Diesel USA’s trip to bankruptcy court.

Structural shifts in retail, high rents, changing consumer habits and the convenience of shopping online have left many brick-and-mortar retailers in bankruptcy — including Sears Corp., Nine West, Charlotte Russe, David’s Bridal and most recently Payless ShoeSource.

Diesel USA, which filed for protection from its creditors in a Delaware court on Tuesday, operates in a category that has some momentum, but the higher-priced brand just wasn’t able to capitalize on it. 

The jeans market — from fashion looks to classic blue jeans — has been on the rise. The overall U.S. jeans business grew 3 percent in 2018 with a 6 percent increase in the women’s segment, according to The NPD Group’s Consumer Tracking Service. That’s on top of a 2 percent gain in 2017.

“It exemplifies the fact that some stores have done a better job of promoting their own brands,” said Marshal Cohen, NPD’s chief industry adviser, and added that value jeans, like the kind found at Target Corp. and Old Navy, have had the biggest growth spurts. 

However, Diesel is on the other end of the price spectrum, charging anywhere from $178 to nearly $400 for a pair of jeans, where value brands start closer to $20.  

Overall, denim has been seen as solid or even strong with the continuation of all things ath-leisure.

“The jeans business has remained exceptionally stable through industry disruptions and economic cycles during an extended period of time,” said Scott Roe, vice president and chief financial officer of VF Corp., after the company said in August that it would break apart its core brands, housing denim brands Lee and Wrangler in a new company called Kontoor.  

Rival jeans maker Levi Strauss & Co., the San Francisco-based company that invented blue jeans in 1873, filed for an initial public offering last month and said revenues jumped 14 percent last year to $5.6 billion. Many of those sales came from physical storefronts. In 2018, Levi’s added 74 stores to its fleet.

And American Eagle Outfitters also had record sales in its jeans business last year. The teen retailer sold more than $1 billion of its popular AE jeans last year.

“We still see a big market in denim,” said Jay Schottenstein, chief executive officer of American Eagle Outfitters Inc., on a call with analysts Wednesday. “This year is going to be a huge year for jeans.”

But Diesel USA, a subsidiary of Italian parent company Diesel SpA, and the only distributor of Diesel jeans in the U.S. since it launched in 1995, failed to catch the denim momentum.  

In the bankruptcy filing, the company said it has $100 million in assets and about $50 million in debt. The 28 U.S. stores are spread across 11 states, consisting of 17 full-price locations and 11 factory outlet stores.

But annual sales in the wholesale and retail divisions have plummeted since 2014 — in brick-and-mortar stores by more than 50 percent. The losses were only slightly offset by Diesel USA’s digital business. In 2018, the 17 full-price stores lost $9 million in earnings before interest, tax, depreciation and amortization. 

Poor decisions by previous leadership, landlords unwilling to negotiate leases and even cyber fraud have added to the mounting losses. The company said it lost roughly $1.2 million in cyber fraud over the last three years. That’s in addition to pricy leases, which set the company back more than $25 million each year. And some of those leases won’t expire until 2026.

The bankruptcy will give the company a “fresh start,” according to a statement released by Diesel. 

“The filing is a critical step in enabling Diesel USA to address certain long-term liabilities for a healthier and stronger business in the country,” the statement said.

Mark Samson, chief restructuring officer for Diesel USA, added that filing for bankruptcy is something many retailers have had to do to stay afloat as the industry continues to evolve.

“Absent the ability to utilize the Chapter 11 process to obtain such relief, [Diesel USA’s] ability to continue operating would be severely threatened and it would be unable to implement the reorganization business plan,” Samson wrote in the court filing. 

Diesel USA’s comeback plan will include a quick trip through bankruptcy court. The three-year plan will reevaluate Diesel’s U.S. store fleet, which would likely entail closing unprofitable stores and opening smaller stores, strengthening the company’s digital presence, working with influencers to attract Gen Z and Millennial shoppers and possibly introduce products and wholesale partnerships. The company hopes to be profitable again sometime in 2021.  

The parent company, Diesel, which was founded in Italy in 1978, and is not part of Diesel USA’s bankruptcy proceedings. A hearing is set for April 11 to determine if Diesel USA’s restructuring plan will receive approval.

Diesel declined to comment further. 

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