Lingerie retailer Frederick’s of Hollywood Group Inc. has long been known for selling the kind of risqué undergarments that can get hearts racing.
But the Hollywood company’s own pulse has grown weaker and weaker since it became a publicly traded company nearly four years ago.
Now Frederick’s has received notice that it could be delisted from a major stock exchange if it doesn’t turn its business around.
The biggest problem, said Frederick’s Chief Executive Thomas Lynch, was a wholesale company Frederick’s merged with in 2008 that had been posting significant losses. Frederick’s sold that division, Movie Star Inc., in October last year.
Lynch said that losses from the Movie Star business hampered the company’s reinvention efforts by broadening its product line.
“Frankly, the merger just didn’t work,” Lynch said. “We worked hard to unravel the merger and sell Movie Star, and now we’re better positioned going into next year.”
Lynch is looking toward implementing long-discussed plans to expand the brand from Frederick’s lingerie roots into items such as loungewear, athletic clothing and beauty products.
“What we’ve been working on for the last couple years is developing Frederick’s as a lifestyle brand,” he said.
Frederick’s, which trades on the New York Stock Exchange’s Amex, got a notification letter from the exchange Nov. 30 that shareholder equity was below the requirement for a company that has posted net losses for two out of three and three out of four most recent years. Frederick’s shareholder equity for fiscal 2011, which ended July 30, was $159,000, well below the $2 million and $4 million requirements, respectively.
The company has 18 months – until May 2013 – to raise shareholder equity above the required amount to avoid delisting.
Lynch declined to comment how the company will take care of the problem, saying that Frederick’s will submit the necessary plan to the NYSE Amex early next month.
The 440-person company reported a fiscal 2011 net loss of $12.1 million on revenue of $120 million, compared with a loss of $21.2 million on revenue of $134 million in fiscal 2010.
Lynch said he made a big effort to trim expenses over the last year to narrow the company’s losses. In addition to offloading Movie Star, the company closed three stores.
The company’s sales have suffered as the result of an industrywide recessionary decline, said Jack Plunkett, chief executive of Plunkett Research Ltd. in Houston.
“The retail environment has been difficult for most sellers of discretionary items,” he said. “Consumers are a lot more reluctant to part with their money.”
Broadening brand
In the midst of the company’s financial struggles, Linda LoRe, the company’s longtime president, resigned in August. She was replaced by retail veteran Don Jones, who is president and chief operating officer.
Lynch said LoRe’s departure was a joint decision.
“In this tough economic environment, it’s all about execution for us,” he said. “Linda had done a good job for us and seen the company through a lot, and we mutually agreed that it was time.”
Lynch added that since joining Frederick’s, Jones has helped the company to four consecutive months of sales increases.
The company made its name as a seller of provocative lingerie, but it has also sold some other items such as dresses and fragrances. In fiscal 2011, those products made up 18 percent of retail sales.
Lynch said he sees an opportunity to make those operations a much larger portion of the business. Frederick’s has already introduced footwear online and in some flagship stores, such as its Hollywood location. He said that inventory and other expanded offerings could hit stores next year.
Plunkett said expanding beyond lingerie could help Frederick’s compete with industry giant Victoria’s Secret of Columbus, Ohio. But he warned that it might be hard for the company to change its image.
“Frederick’s hasn’t really been the kind of place you’d go to for day-to-day items, but more fun items and edgy things,” he said. “If they round out that merchandise, it’s going to change how people perceive them. That may work and may not.”
One area where Plunkett said Frederick’s might find success repositioning itself is internationally.
The company opened a flagship store in Abu Dhabi earlier this year. Frederick’s plans to announce three locations in the United Arab Emirates, and is considering opening stores in Brazil, South Korea, China and India, Lynch said.
“We’ve done some work to check on the perception of our brand and we’ve found the recognition factor is really high internationally,” he said.
Merger mishap
Frederick’s began trading on the NYSE Amex in 2008 when it did a reverse merger with Movie Star, a New York manufacturer of lingerie and sleepwear. Frederick’s became Movie Star’s public holding company.
But Lynch said the merger didn’t work as well as planned. Movie Star contributed significantly to the company’s losses. For example, in fiscal 2010, the wholesale business had an operating loss of $12.4 million, more than half of the company’s $21.2 million net loss.
The Movie Star losses also caused some vendors to place credit limits on Frederick’s, resulting in inventory shortages during last year’s busy holiday season, he said.
“We had a cash drain as a result of the struggles that this merger created,” he said. “The deteriorating health of the combined company contributed to the less than optimal inventory levels.”
Instead of trying to revive the Movie Star business, Frederick’s sold the division to Dolce Vita Intimates of Harrison, N.J., for $4.5 million
Lynch said the sale freed up the company to focus on expanding beyond lingerie.
“I’ve got a company focused entirely on the Frederick’s of Hollywood brand rather than on a merged company that just wasn’t working,” he said.
