Boohoo.com plc’s $20 million go at Nasty Gal Inc.’s intellectual property was confirmed Wednesday and takes the company far from its height just a handful of years ago, when its valuation swelled to $200 million. Nasty Gal had appeared on an upward trajectory, pulling all the levers when it came to branding — playing up its edgy voice, its founder’s path in building something from nothing, a female-fronted business, the allure of a digital company, former Apple Inc. and J.C. Penney Co. Inc. executive Ron Johnson as an investor and $65 million in funding — but it proved not enough to ward off a bankruptcy.
Index Ventures, which invested in Nasty Gal, calls founder Sophia Amoruso an “e-tail trailblazer” on its site, saying the company has been “turbo-charged by social media buzz” and a business that has grown more than 500 percent annually since its start.
“It was all about the potential and I think that at that time, online retailers were getting a lot of attention,” said Brien Rowe, managing director at investment banking firm D.A. Davidson & Co. “Venture capitalists were putting a lot of money into online retailers. There was a lot of excitement around it and ultimately they needed to execute and they had execution and management and personality challenges. And that was at the heart of the fall of the business. Also, it started out as a very edgy, cool brand and as you grow, you start to lose that and suddenly they’re opening brick-and-mortar in Santa Monica on the Promenade and it just didn’t feel as cool as it did in its first years of existence.”
Today, the operating component of the business — which would include leases at its 2,500-square-foot store at Melrose Avenue and 6,500-square-foot door at the Third Street Promenade in Santa Monica, along with sales from vintage and third-party apparel and accessories — appears of little value for the future. At least not to the company’s prospective suitor, whose purchase agreement snaps up only the intellectual property.
The parsing off of the business places Nasty Gal in a boat similar to that of Los Angeles-based American Apparel LLC, which filed for its second bankruptcy last month and has also attracted a potential buyer of its intellectual property in Gildan Activewear Inc. The breaking out of the IP assets could be an emerging trend in retail bankruptcies, said Michael Malter of the law firm Binder & Malter LLP.
“I think that there is a reason for real concern here,” Malter said. “We’ve known that online purchasing was going to have an impact on retail, but it seems with these bankruptcies that the greater value to the purchasers are the customer lists and there just is not a real desire to keep the brick-and-mortar….Merchants are singing the blues about escalating rents and if you can get away from the overhead from the rents and a greatly diminished payroll, there’s a much greater opportunity to do just online sales and jettison the heavy overhead of continuing to run brick-and-mortar stores.”
Both Boohoo and Nasty Gal declined to comment beyond their respective press releases Wednesday.
Nasty Gal president and chief restructuring officer Joe Scirocco said of the deal: “We believe this path will generate the highest value for the company and ensure the continued success of the Nasty Gal brand that has served its consumers as a leading style destination over the last decade.”
A judge is expected to rule on bid procedures with a possible auction to be had by early February and a deal closing by the end of that month.
Nasty Gal’s own successes and rapid growth proved its greatest hurdle from an operational perspective, according to Scirocco’s declaration filed in court last month. He valued the going-concern business at $25 million based on pro-forma earnings before interest, taxes, depreciation and amortization of between $3 million and $5 million, which could be broken down to a valuation on the intellectual property of at least $5 million to $10 million and a value pegged to the company’s inventory of between $15 million and $20 million, the declaration said.
Nasty Gal had net revenue of about $77.1 million for the 12 months through January of this year, down about 9 percent from the year-ago period. The company reported negative EBITDA of $6.3 million for its fiscal year ended Jan. 31, 2015, and negative EBITDA of $15.4 million the following year.
Scirocco said in the declaration Nasty Gal expects to cap its fiscal year ending Jan. 27 with negative EBITDA of $1.4 million and net revenue of $77 million, aided in part by the rebound of the U.S. business.
Buzz about Boohoo’s interest in the IP was set off last month with its registration of the business Nasty Gal Ltd. in the U.K. less than two weeks after Nasty Gal filed for bankruptcy in the U.S.
Boohoo, if successful in its purchase, would nab a toehold in the U.S. with the deal. Co-chief executive officers Mahmud Kamani and Carol Kane of the Manchester-England based company said in a statement, “[It’s] a fantastic opportunity to add such a well-established, global brand to the Boohoo family” and would “represent an ideal next step in inspiring an ever-growing range of young customers internationally.”
“It could be a great strategic acquisition for Boohoo,” Rowe said. “It accelerates their position in the U.S. They are doing everything that Nasty Gal really could have done, which is executing well on their growth plan and they’re profitable. They have some great infrastructure. If you look at their planned investments, they plan to spend significantly on IT and warehousing….It could be a great outcome for Boohoo and for the people that remain with Nasty Gal.”