INTIMATE APPAREL retailer Frederick’s of Hollywood, citing a combination of debt incurred from a leveraged buyout and several “costly strategic mistakes by previous management,” filed for Chapter 11 bankruptcy protection last month. The company plans to continue operations during its restructuring.
According to court documents filed in U.S. Bankruptcy Court for the Central District of California, the company’s liabilities total $67 million. This figure includes $28 million for goods and services received and merchandise on order. Creditors’ names were not available at press time.
The company attributes its financial woes to a series of missteps by former management. These include not conducting research to back a rebranding strategy that included $9 million in expenses for inventory. Much of this inventory was later liquidated at reduced prices, resulting in a loss of $5 million.
Vice president of direct marketing Danielle Savin adds that mailing plans designed by former management that “made no sense” resulted in a drop in Frederick’s house file from 1 million to 568,000. She says that despite having shifted its focus from racy offerings to a more staid apparel approach, management heavily mined the house file and rented adult-oriented lists instead of seeking prospects better suited for the company’s new look.
Another misstep came in July 1999 when the company spent $6 million to move its warehouse and distribution facilities from Southern California to a custom-built warehouse in Phoenix that has an inventory and fulfillment capacity three to five times greater than Frederick’s needs, the documents say. And in the years following the buyout the company’s management spent $3 million on creative marketing consultants that did not produce tangible results.
In addition, the papers state that several of its vendors switched merchandise delivery terms from credit to cash on delivery after a dispute resulted in its former auditors Arthur Andersen not releasing Frederick’s audited financial statements for the year ending July 31, 1999. The change in terms, according to the papers, resulted in a “severe strain on [Frederick’s] cash resources.”
The company says that it would generate $6 million in pre-tax earnings on $140 million in sales for the financial year ending July 31. But it also claims that failure to secure authorization to seek interim relief would result in Frederick’s not being able to satisfy its $350,000 payroll last month. The company said it did not foresee any layoffs.
The Hollywood, CA-based cataloger and retailer will continue to operate its businesses during the debt restructuring period and has received financing commitments from Ableco Finance LLC. The money will be used to fund operations and to purchase inventory.
“We have worked for 55 years to build this company into an internationally known brand. We’re not going to let it dwindle away,” says president and chief executive officer Linda LoRe.
Under the reorganization plan, LoRe will continue in her current position, which she’s held since September 1999. James Skelton, a principal of Crossroads LLC, has been named chief operating officer and will be responsible for managing the bankruptcy process.
And in June, the book’s creative design was taken in house from New York creative design consultancy AGA Catalog Marketing and Design when its one-year contract ended.
According to the documents, Frederick’s incurred $41 million in debt during its stock buyback of September 1997, leaving it with $1.8 million in cash and no more than $10 million in working capital credit. In June, Wilshire Partners of Newport Beach, CA purchased Frederick’s from Knightsbridge Capital Corp., Chicago.
The company also listed $10.8 million in inventory, including $3.7 million in unencumbered inventory from its Hollywood Mail Order subsidiary; $4.6 million in prepaid expenses, including those for the catalog and marketing; $2.5 million in accounts receivable; $10.7 million in furniture and equipment; $4.9 million in deferred income tax benefits; $32.8 million in trademarks, service marks and other intellectual property; and cash on hand.
The Frederick’s customer file is managed by Fasano & Associates in Los Angeles and names 562,620 last-12-month buyers. List manager Paula Smith says the file is still active and Frederick’s is still mailing. “Nobody’s panicking about it,” she says.
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