‘CRUSHING’ DEBT LOAD FORCING FREDERICK’S TO FILE CHAPTER 11
Byline: Karyn Monget
NEW YORK — Frederick’s of Hollywood, one of the most famous — and risque — names in the lingerie business, will file for Chapter 11 bankruptcy protection today.
The bankruptcy petition — which, surprisingly, follows the June 16 acquisition of the 54-year-old lingerie specialist by Wilshire Partners, a private investment firm based in Newport Beach, Calif. — will be filed in the United States Bankruptcy Court for the Central District of California, Frederick’s officials told WWD Monday.
They said the primary reason for Frederick’s seeking bankruptcy protection is a “crushing” debt load of $70 million, a burden that left little margin for error or building the Frederick’s brand into a global business after the company was acquired in a leveraged buyout by Knightsbridge Capital Inc. in 1997.
Observers say Frederick’s financial hardships — which have plagued the company for close to a decade and forced its principal shareholders to sell their Frederick’s stock in 1997 to settle tax liabilities of between $11 million and $12 million — have basically handicapped Frederick’s in its competition with its main rival, Victoria’s Secret, which has grown to dominate the business. Total VS brand sales were about $3 billion last year.
Ironically, despite the Chapter 11 proceedings, the Los Angeles-based retail and mail-order firm is expected to post annual sales of $140 million in the fiscal year ending July 31, said Linda LoRe, president and chief executive officer of Frederick’s in a telephone interview Monday. Operating income after EBITDA is expected to be around $6 million, she said.
LoRe, who joined Frederick’s last July, said she will continue in her current post. She said there are “no plans” for downsizing the company’s work force. Frederick’s has commissioned Crossroads LLC, a national turnaround management and financial advisory firm, as well as the Los Angeles-based law firm Klee, Tuchin, Bogdanoff & Stern LLP, which will serve as outside counsel to help manage the restructuring process.
James Skelton, a principal of Crossroads, has been named chief operating officer of Frederick’s and will oversee the bankruptcy process. Skelton’s experience in the branded apparel and retail industries include the restructuring of Ocean Pacific Apparel Corp. and Gruen Marketing Corp., where he served as chairman and ceo.
“This will be a good thing for the company. It’s been completely cash strapped. We were so loaded with debt, we had to restructure our balance sheets. We will let our senior management know tonight and will file Chapter 11 either late tonight or tomorrow morning,” said LoRe.
“One of the discussions we had with legal and financial counsel as they [Wilshire] were purchasing the company was this would be the course of action for Frederick’s. The new owners and management decided on that late this weekend.”
Attorney Michael Tuchin said: “The company is profitable, which is unusual for a Chapter 11 company. The problem is the debt has been so great that [the profit has] gone to satisfying the interest and principal of the debt.
“Linda LoRe is one of the finest executives around. She has a vision, but has been hampered by the financial difficulties,” added Tuchin.
The retail operation includes 200 stores around the country, which generate yearly revenues of $96 million; sales on the year-old redesigned Internet site, fredericks.com, grew to $10 million from $3 million in 1999, LoRe said. The remaining sales are from the catalog.
“We are looking at an immediate cash infusion to buy merchandise and continue operations,” said LoRe, noting that $12 million in DIP funding has been “committed” upon court approval by Ableco Finance LLC, an affiliate of New York-based Cerberus Capital Management.
“The cash infusion will allow Frederick’s to reorganize and capitalize on the estimated 10 percent annual growth in the intimate apparel industry,” she said. “Frederick’s is one of the strongest brands in the world. We will continue to operate our stores, catalog and successful Internet businesses — selling the world’s sexiest lingerie. We have worked 55 years to build this company into an internationally known brand. We’re not going to let it dwindle away.”
She said the DIP funding will go primarily to bringing in inventory for the holiday season. A fall catalog will not be produced. Instead, the company will combine a fall and holiday issue, to be released in October, that also will be a collector’s item, celebrating the 50th anniversary of the catalog.
As reported in WWD, financial difficulties escalated in 1997 when Frederick’s was acquired by Knightsbridge Capital for 9.7 million shares outstanding, putting a value of $69.7 million on the lingerie retailer. At the time, the combined retail and catalog businesses of Frederick’s totaled approximately $148 million.
LoRe, who is a well-known figure in the world of master branding, is a former president and ceo of Giorgio Beverly Hills, where she made her mark in the fragrance field with successful launches of the women’s scents Giorgio, Wings, Red, Ocean Dream and Hugo Woman, and Hugo and Hugo Boss for men.
When Wilshire Partners bought Frederick’s last month, LoRe said she was “ecstatic,” noting, “They are very excited about taking the company forward and achieving the goals I have put in place.” She added that she intended to “de-sleaze” the image of Frederick’s with models that had a softer, gentler look and merchandise with a fashion-forward edge — not the risque numbers many in the trade call “Saturday Night Specials.”
For years, Frederick’s — which was founded by the late Frederick Mellinger and whose name became synonymous with naughty black lingerie — has been trying to clean up its act. George Townsend, a longtime ceo who left the company in 1997, tried to attract the mainstream shopper in middle America by introducing basic cotton terry robes and related cotton sleepwear. He said the experiment hadn’t clicked because consumers expected sexy lingerie from Frederick’s, not granny gowns.
In 1998, another Frederick’s ceo, Terri Patterson — whose tenure lasted less than a year and who filed a wrongful termination lawsuit against Frederick’s parent, FOH Holdings — tried unsuccessfully to give a “contemporary” twist to the mail-order business with models that had more of a girl-next-door look.
With the prospect of $12 million in DIP funds and the possibility of turning Frederick’s into a global brand, LoRe said she feels “extremely bullish.”
“I think we can now do it,” she said.