Lingerie Company No Longer Conceals Problems

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Lingerie Company No Longer Conceals Problems
Frederick’s lingerie store.

Risqué retailer Frederick’s of Hollywood Group Inc. is on the prowl for a beau, but he’s got to have deep pockets.

The cash-strapped lingerie brand announced last week that it hired New York investment bank Allen & Co. LLC to explore strategic alternatives, including potentially selling the company.

“Over the past few months, the board has received several inquiries regarding various transactions,” said Frederick’s Chief Executive Thomas Lynch in a statement. Executives wouldn’t comment further.

For the past four fiscal years, Frederick’s has lost money. In 2011, the company reported a net loss of $10.3 million. In the most recent quarter this year, the company reported a net loss of $3.5 million, despite a 5.3 percent increase in same-store sales over last year. The stock has declined steadily and has been trading under $1 for more than a year.

Like many aging Hollywood starlets, Frederick’s has struggled to stay relevant.

Howard Davidowitz, chairman of national retail and consulting firm Davidowitz & Associates in New York, said the lingerie company hasn’t been as creative and innovative as it once was.

“A business has to continue to evolve, but they got stuck in time,” he said. “They got up against giant opponents and they couldn’t keep pace.”

Frederick’s biggest competition for the past two decades has been Victoria’s Secret, the multibillion-dollar lingerie brand of Limited Brands Inc. in Columbus, Ohio.

The New York Post reported last August that Frederick’s unofficially searched for a buyer last year in order to stay on top of payments for a $7 million loan from Hilco Trading LLC in Northbrook, Ill.

Davidowitz said he’s not surprised the company has made its search official.

“I think this whole thing has been going on for a while. Maybe the situation is getting more urgent,” he said. “Losses can’t go on forever.”

One investment banker who asked not to be identified opined that Frederick’s has no choice but to sell.

“They’re on the verge now of potentially going bankrupt. If they continue to lose money like this, they’re not going to be able to service their debt and they’re going to default,” the banker said.

The company has visited bankruptcy court before. In 2000, it filed for Chapter 11 reorganization and emerged in 2003.

Frederick’s is headquartered on Sunset Boulevard in Hollywood. It has 438 employees and 122 stores as of January.

The company got its start in 1946 as a racy mail-order undergarment operation in New York, then called Frederick’s of Fifth Avenue. Founder Frederick Mellinger moved it to Hollywood in 1947, where he opened a retail space to sell his then-groundbreaking fashions. Frederick’s is credited with introducing American consumers to the push-up bra, thongs and the French bikini. But while the company thrived in the liberal cultural climate of the 1960s and 1970s, sales started to sag in the increasingly conservative 1980s. In the last three decades, the company worked to clean up its once-raunchy image. But in doing so, some say the lingerie company only put itself in the shadow of rising retailer Victoria’s Secret.

Davidowitz said the lingerie company needs to find a buyer that will be committed to differentiating the company from Victoria’s Secret.

“They need someone with a new vision,” he said. “I think going after Victoria’s Secret at this point is insane. They can’t afford to do that. I think it’s too late for that.”

Paul Zaffaroni, a director at Newport Beach investment bank Roth Capital Partners LLC, said the company would do well to sell itself to a firm that will work to capitalize on the international recognition of the Frederick’s brand.

“I think ultimately what’s going to happen is the buyer will be someone that’s in the brand management business, who will take the brand and license it out to other folks,” Zaffaroni said.

Davidowitz said the company needs to completely rethink its image and target demographic.

“They still have a world famous catalog, but what do you put in it? Who’s the target? That’s the question,” he said. “There are lots of different ages and sizes and types of women. Maybe even men’s underwear is possible.”

In its announcement, Frederick’s said it would not limit its options to a sale of the company. It will look at other business combinations, too.

But analysts agree that’s unlikely to happen.

“It’s going to be hard to get someone to put money into the business without having control,” the investment banker said.

Davidowitz said anything less than a sale of the company wouldn’t be enough.

“They don’t need a Band-Aid. A Band-Aid won’t help them,” he said. “They’re going to need a deep-pocketed buyer who sees something in this brand.”

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