(Filed Under Financial and General Interest News). Frederick’s of Hollywood Group, Inc. reported Friday a loss of $22.5 million for 2013, as well as a dramatic 22.4% drop in sales from $111.4 million in the fiscal year ended July 28, 2012 to $86.5 million for the year ended July 27, 2013. The release of the year-end results comes as the company’s “sole disinterested independent director“ considers a recent offer to take the company private. And two weeks after Frederick’s amended agreements with its lenders, resulting in, among other things, an increase in its revolving line of credit from $24 million to $35 million with “$5 million having been advanced on October 10.”
In all, the company has lost money in each of the past five years, with the accumulated loss now totaling $96.2 million. It has also been gradually closing stores, with the total in the U.S. now down to 113 as of the end of July, with more consolidation to come. “We will continue to close certain under-performing stores upon the expiration of their respective leases,” the report stated.
The company stated total store sales for fiscal 2013 decreased $14.3 million, or 20.1% when compared to last year, while comparable store sales decreased $10.6 million, or 16.7%. The company blamed “lower consumer traffic at our stores, which is primarily attributable to lower promotional activity relating to core intimate apparel products (bras, lingerie and corsets); the reduction in the number of stores during the fiscal year from 118; “lower sales of core intimate apparel products (bras, lingerie and corsets), which is primarily attributable to a reduction in inventory levels in these categories. Sales for these categories were also negatively impacted by the late delivery of products from our vendors due to slower payments;” and “the poor performance of our expansion into non-core product categories (dresses, sportswear and shoes).”
At the same time, direct sales to consumers decreased even more sharply, by $8.4 million, or 23.5%, as compared to the year before. “This decrease is primarily attributable to mailing fewer catalogs during the year ended July 27, 2013 as compared to the prior year as part of our efforts to reduce catalog costs and reallocate resources to our digital marketing initiatives, as well as a reduction in the inventory levels of bras, lingerie and corsets, and the late delivery of products from our vendors due to slower payments.”
Some of the loss reported was due to the decline in gross profit as a percentage of net sales. The firm reported that gross margin for fiscal 2013 “was 29.1% as compared to 37.4% for the year ended July 28, 2012. The largest contributors to the decrease in gross margin were the following: Product costs as a percentage of sales increased by 3.7 percentage points for the year,” Frederick’s reported. It added, “This increase in costs as a percentage of sales was due to an increase in promotional activity.” In addition, “Vendor allowances decreased by $889,000 during the year ended July 27, 2013 as compared to the prior year; however, as a percentage of sales, vendor allowances increased to 5.0% of sales for the year ended July 27, 2013 from 4.7% of sales in the prior year.”
Throughout the report there are references to the increasingly heavy burden borne by those firms which supply apparel to Frederick’s. Despite the decrease in sales volume at the company, Frederick’s reported “an increase in accounts payable and other accrued expenses of $3,611,000, which resulted from slower payments to vendors.”
In a discussion of its suppliers, Frederick’s reported that “In fiscal year 2013, we purchased products from approximately 96 vendors. Our top ten vendors accounted for approximately 74% of the dollar value of those purchases. We had three suppliers that individually accounted for 10% or more of total purchases in fiscal year 2013. One supplier based in China accounted for approximately 22% of total purchases and two suppliers based in Canada accounted for approximately 13% and 11% of total purchases in fiscal year 2013.”
Frederick’s continued that “Although we have no long-term manufacturing contracts, our relationships with vendors are long-standing, with several vendors supplying products for over twenty years. To assure adequate sources, each major product category is sourced from multiple vendors. We also test products from new suppliers and expand their services to us as appropriate. We do not believe that we are overly dependent on any one supplier, and the loss of any one of them would not have a material effect on our business. However, due to our liquidity issues, we have had difficulty developing relationships with new vendors to source and manufacture our merchandise.”
Frederick’s reported mailing customers 58.3% fewer catalogs in 2013 (only 4.5 million, down from 10.8 million in 2012) which it blamed explicitly for the 23.5% decrease in its direct to consumer business, and which also, most likely, had a negative impact on its retail store traffic. The company does not, however, plan to alter this strategy. “We have steadily reduced catalog circulation due to the costs involved in producing a traditional catalog, and have continued to allocate resources to more innovative direct mail pieces and cost-effective digital marketing alternatives such as partnership marketing with magazine websites, digital display advertising, email retargeting, affiliate marketing and increased search marketing.”
Other recent cost saving initiatives include outsourcing “our customer contact center” and stores distribution to “third party” providers.
The annual report warns that “Our significant losses and working capital deficiency raise questions about our ability to continue as a going concern,” and it cites the ongoing losses, “a working capital deficiency of $12,349,000 and a shareholders’ deficiency of $17,401,000” for fiscal 2013. Referring to its financing arrangements and the proposal to take the company private, the report noted, “If management’s plans are unsuccessful, we will need to raise additional capital. We could seek to raise additional capital through debt or equity financings, strategic relationships or other arrangements. However, additional financing may not be available in amounts or on terms acceptable to us or at all, and if available, may be at prices and on terms that may not be as favorable as they would be without a going concern qualification. The foregoing could negatively impact our results of operations.”
In remarks that accompanied the report, Thomas Lynch, the company’s chairman and CEO, explained, “The financial results for fiscal 2013 reflect the previous financial challenges we have faced, which impacted our ability to fully deliver on our merchandising strategy and overall brand strategy. However, we believe that these challenges can be overcome given the ongoing support we’ve received from certain vendors, partners and our lenders, and their commitment to the Frederick’s of Hollywood brand.”
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