Commerce premium denim maker Joe’s Jeans Inc. had designs on growing sales and cutting costs when it paid about $94 million for neighbor and rival Hudson Clothing Inc.
But since the deal closed in September 2013, Joe’s has had trouble putting its plans into action and now appears in serious financial peril.
Two chief executives have left the company just this year; its stock has fallen to less than 20 cents a share and is on its way toward getting booted from the Nasdaq exchange. The company has defaulted on more than $90 million in debt, much of it used to buy Hudson.
As a result, lenders have prohibited Joe’s from paying $27.5 million in convertible notes it owes to Hudson founder Peter Kim and Fireman Capital Partners, a Boston private equity firm that owned a controlling stake in Hudson.
Kim’s share of those notes is worth $14 million. He had been a member of Joe’s board, but resigned last month and simultaneously asked Joe’s to open its books to independent financial analysts because he feels the company is not acting quickly enough to resolve its financial situation.
When Joe’s acquired Hudson, executives thought they could increase sales while cutting costs by consolidating the two companies’ material sourcing and moving Hudson’s manufacturing from high-cost Los Angeles to low-cost Mexico, where Joe’s already made its products. But 15 months later, the consolidation plans have barely gotten off the ground.
Jeff Van Sinderen, an analyst with B. Riley & Co. in West Los Angeles who stopped covering Joe’s last month, said the lack of expected savings from consolidation are at the root of the company’s troubles.
“The plan was that sourcing efficiencies would provide the much needed leverage,” Van Sinderen said. “That strategy appears to be derailed at this point.”
Joe’s executives did not return calls for comment.
Joe’s, founded in 2001, sells its jeans for about $120 a pair at 30 of its own retail stores as well as in department stores and boutiques. The company sources and produces most of its jeans and other denim clothing in Mexico, where labor and manufacturing costs are cheaper.
Hudson, founded in 2002, also is headquartered in Commerce and makes high-end jeans as well as other men’s and women’s clothing, but it manufactures its products in Los Angeles.
Joe’s executives believed that buying denim and other materials in bulk for both companies and moving Hudson’s manufacturing into Joe’s existing operations in Mexico would save a substantial amount of money, though the company did not disclose the amount of expected savings.
But in its annual report for its 2014 fiscal year, which ended Nov. 30, Joe’s reported that only a small portion of Hudson’s production had been shifted to Mexico and that Joe’s had “not integrated the operations of Hudson in any material respect.”
Analyst Van Sinderen said the plan to eliminate redundancies and take advantage of a common infrastructure is a proven technique when companies acquire other companies, but one that appears to have failed for Joe’s.
Furthermore, he added that Joe’s fourth-quarter sales of $41 million were not only down from $51 million in the same quarter a year earlier, but fell well short of his estimate of $55 million.
After Joe’s bought Hudson, it employed 561 employees, which included absorbing 132 workers from Hudson. By last month, the company had reduced that number to 400, having cut the workforce from both brands.
Amid those disappointing sales figures, losses have mounted. Last year, Joe’s reported a loss of $27.7 million, more than three times the prior year’s loss of $7.3 million.
Those losses pushed Joe’s to default on a $60 million loan from Garrison Loan Agency Services and on a revolving credit with Livingston, N.J.’s CIT Group Inc., which was owed $31 million at the close of Joe’s fiscal year.
Van Sinderen said Joe’s will have to work with lenders, either by refinancing its debt or amending loan terms, or declare bankruptcy.
“We do not see the company continuing to operate in its current form,” Van Sinderen wrote in a Feb. 17 report to investors. “It appears that some sort of restructuring will be necessary.”
The defaults have also kicked in a contingency built into the loan agreements prohibiting Joe’s from paying Kim and Fireman Capital. As part of the acquisition deal, Kim received $14 million in convertible notes that could be converted into about 8 million shares of Joe’s common stock in September, the two-year anniversary of the sale.
Kim announced his resignation last month and asked for an independent financial review, a move that came after two chief executives resigned – a third has since been named as interim – and the denim maker delayed an earnings report as it tried to negotiate new loan terms.
Kim declined to comment for this report.
In filings responding to Kim’s request, Joe’s said it has already hired New York’s Carl Marks Advisory Group to help form a restructuring plan and either secure new financing or amend existing loan terms.
The company’s had tumult at the top. Marc Crossman resigned as chief executive on Jan. 19 and became a consultant to the company. Crossman was replaced with interim Chief Executive Samuel Joseph Furrow Jr. He resigned without explanation Feb. 11 and was replaced by his father, Samuel J. Furrow.
Shareholders have reacted to the turmoil and Joe’s stock has tumbled, closing at just 17 cents a share March 4. It’s now on the verge of getting booted from the Nasdaq exchange, which requires stocks to trade at $1 or more. Most analysts have stopped following the company.
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