FREDERICK’S OF HOLLYWOOD FILES CHAPTER 11 PETITION
Byline: Vicki M. Young / with contributions from Karyn Monget / Kristi Ellis / Arnold J. Karr
NEW YORK — Frederick’s of Hollywood took the first step towards putting a past of rising debt and declining market share behind it late Monday when it filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Central District of California in Los Angeles.
Frederick’s is seeking court permission to enter into a debtor-in-possession financing agreement with Ableco Finance, a special situations lending company. Ableco is affiliated with Cerberus Capital Management and Gabriel Capital Group.
Frederick’s said in court documents that it expects to emerge from Chapter 11 as a viable going concern. One example of its effort to do that, the firm explained, is its pricing of merchandise at a “blended initial retail markup of over 150 percent over cost. Based upon this markup, [Frederick’s] can expect to generate approximately $28 million in retail sales proceeds from their existing inventory.”
Frederick’s said the company has about $32 million in secured debt owed to senior lenders Credit Agricole Indosuez, IBJ Whitehall Bank & Trust Co. and ML CLO XV Pilgrim America (Cayman) Ltd., as well as Finova Capital Corp. Total unsecured debt is $43 million. It consists of $13 million owed to Fleet Bank Boston NA, $2 million owed to DLB Investments Corp., $6 million in pre-petition trade debt and $22 million in pre-petition, confirmed merchandise that’s on order with trade vendors. Among the vendors holding the largest unsecured claims are: Ce Soir Lingerie Co. of Ventura, Calif., $3.54 million; Felina/ Shandiz Lingerie, Chatsworth, Calif., $2.46 million; Wonder-Form Inc., St. Leonard, Quebec, $1.57 million; Inner Secrets/ Allegria, Harrison, N.J., $1.54 million; and Bennett & Co., Newburyport, Mass., $1.21 million.
Assets of $66.3 million include $32.8 million for trademarks, service marks and other intellectual property; $10.8 million in inventory; $10.7 million in furniture and fixtures; and $2.5 million in accounts receivable.
According to court papers, the company’s cash crisis was triggered by the termination by certain factors of accounts receivable financing upon which some of Frederick’s largest vendors had relied. Those vendors added to the crisis by placing Frederick’s on cash on either delivery or receipt of invoice status. The company said in bankruptcy court documents that the shutting of financing “resulted from the debtor’s failure to obtain audited financial statements for the fiscal year ending July 31, 1999.” Frederick’s said the delay is connected to a dispute with its former auditor, Arthur Andersen.
The company expects to post sales of $140 million for the fiscal year that ends at the conclusion of this month. Frederick’s said in in its petition that approximately two-thirds of its sales — or roughly $92 million — are generated by its stores. Of the remaining third, 75 percent, or about $36 million, is generated by its mail order unit, and 25 percent, about $12 million, through the Internet.
Most industry experts queried felt that, with less debt and a less raunchy, more sophisticated image, the beleaguered lingerie specialist could get back on its feet again and perhaps win back some of the lucrative intimate apparel market lost in recent years to Victoria’s Secret.
The general consensus was that with the business and marketing background of Linda LoRe, Frederick’s president and chief executive officer, Frederick’s could eventually garner a bigger stake of the lucrative intimate apparel market that Victoria’s Secret has gobbled up.
Michael Gould, chairman of Bloomingdale’s, said, “I think Linda is a terrific merchant and she has great leadership skills. My opinion is if the ownership of the Frederick’s business wants to make it happen, she’s the one who can make it happen for them.”
In addition to LoRe’s arrival last July, there have been signs of progress over the past year. Frederick’s has introduced a number of core products such as The Hollywood Kiss Bra that “hoists the breasts up until they kiss,” said spokeswoman Amanda Diaz in an interview last year, and the liquid filled H2O Bra, which retails for $36. Between 4,000 and 5,000 units of the H2O Bra are reportedly sold each week.
But despite good sell-throughs of key products, Frederick’s appeared dogged by financial problems dating back to its 1997 leveraged buyout and continuing through its June acquisition by Wilshire Partners.
Sheila Solomon, national sales manager of Priamo Designs, observed, “There are enough people who know the Frederick’s name. But in order for them to succeed, I think they’ll have to have a better blend of merchandise. Their catalog is still raunchy.”
“A reevaluation of who their core customer is will bring them out of the woods,” said Mara Susskind, president and national sales manager of National Corset Supply House, which has made private label foundations for Frederick’s for 30 years and holds unsecured claims of more than $1 million.