Struggling denim purveyor Joe's Jeans Inc. (Nasdaq: JOEZ) is in refinancing negotiations with lenders and is working with a restructuring adviser to consider strategic alternatives.

Joe's has a lot of problems. It defaulted on its loans, lost its CEO, and isn't compliant with Nasdaq listing requirements. The business hired Carl Marks Advisory Group as a restructuring adviser.

In the company's latest annual filing with the U.S. Securities and Exchange Commission on Feb. 13, Joe's says that its auditor, Moss Adams LLP, has raised substantial doubts about its ability to continue as a going concern, or without the threat of liquidation. Joe's also said that while it is in discussions over the loan defaults, if it does not work out some kind of refinancing, it may be forced into Chapter 11 bankruptcy. Moss Adams raised the concerns because of the company's net working capital deficiency, which is caused by debt covenant violations and recurring losses.

Joe's is just one of many troubled retailers, as companies have an increasingly tough time remaining solvent in an e-commerce-dominated world. Several other public retailers, including Wet Seal, Cache and Delia's, have ended up in bankruptcy protection. (All of those retailers will be delisted from their respective exchanges on March 9.)  

Commerce, California-based Joe's makes jeans, apparel and accessories for men, women and children. The brand was created by Joe Dahan, who is still in place as creative director, in 2001. Joe's products are sold in department stores and 33 company-owned boutiques.

Joe's is in talks with lenders Garrison and CIT under both its term loan and revolving credit agreements, both of which it defaulted on in November. To stay in business, Joe's needs to resolve the outstanding debt, the company says in the Feb. 13 filing. Even if the company is able to refinance, it could potentially end up with a loan that carries new, more restrictive covenants, which could leave it with little wiggle room in terms of operational flexibility.

In November 2014 when Joe's defaulted on the Garrison loan it caused a default with CIT. Those defaults then forced the company to default on its subordinated convertible notes because it isn't allowed to make those payments while in default on the other loans.

Aside from ongoing debt negotiations, the company still has a company to integrate and a CEO to replace. 

In 2013, Joe's spent about $98 million to buy denim business Hudson Jeans. The Los Angeles-based business also designs and markets men's and women's apparel. About $65.4 million of that price was in cash.

Before Joe's bought Hudson, it mainly operated with cash on hand from sales and through a factoring agreement, according to SEC filings. But after that acquisition, the company has had to depend more on the revolving credit facility from CIT and term loan from Garrison.

Joe's also says in the Feb. 13 SEC filing that it expected cost savings to come from the Hudson acquisition, but it hasn't yet integrated the company. One of Joe's plans involves moving Hudson's manufacturing facilities from Los Angeles to Mexico, which could potentially cause a negative reaction if Hudson's consumers are looking for a U.S.-manufactured product.

The founder of Hudson, Peter Kim, resigned from Joe's board of directors mid-February amid concerns the company was not taking enough action to regain financial stability. Kim's letter did not identify reasons for his resignation, but he stated that he had asked the board to give B. Riley, an investment bank, access to the company's financial information, which it did not grant because it had already hired Carl Marks Advisory as financial adviser, the board says in a Feb. 17 SEC filing. Kim is still in place as CEO of Hudson.

B. Riley is currently lined up to buy Wet Seal, the teen, primarily mall-based retailer that filed for bankruptcy protection in January. (For more see Finance Finesse: DIP Loans May Rescue Struggling Retailers.)

Kim, in letters to the company's board, "stated that he did not believe that others were acting with the necessary urgency given the company's financial situation," according to a filing with the SEC.

Joe's operates another little-known brand, called else, which targets young women looking for lower denim prices. Joe's pants run between about $150 to $400 per pair, but else's are priced at about $68. When the brand was started in 2012 it had a distribution partnership with Macy's, which has since ended. Though the products are available in limited qualities in other locations, Joe's says it sees the future of that brand as "extremely limited."

In January, Marc Crossman resigned as president and CEO. Samuel Furrow has been acting as interim CEO as the company looks for someone to permanently take over the post. Joe's says the credit defaults could hurt its hiring process, so it may have to wait to hire until after it comes to an agreement with CIT and Garrison.

A bright spot does exist – Joe's was able to increase sales from 2013 to 2014. As of Nov. 30, 2014 the company had $188.8 million in annual sales, compared with $140.2 million for the previous year.  

Representatives for Joe's, CIT and Carl Marks Advisory did not immediately respond to requests for comment.

There are several factors contributing to a wave of distress in the retail sector. One of them is e-commerce, which as it rises in importance renders some brands overstored. For more, see Retailers Reconsider Real Estate and Retail Reboot: Investors Snatch Up E-Commerce Services

For last week's edition of Turnaround Tuesday, see Amid Low Crude Oil Prices, Ivanhoe Energy Files for Bankruptcy and Insolvency Act Protection

For a list of struggling companies, check out Mergers & Acquisitions Distressed Company Watch List.  


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