High-end denim purveyor Joe's Jeans Inc. (Nasdaq: JOEZ) has reached a forbearance agreement with lenders, after defaulting in November, according to a July 1 filing with the U.S. Securities and Exchange Commission.
The accord is between, on one side, Joe's and subsidiary Hudson Clothing LLC, and on the other, CIT Group/Commercial Services Inc. and Garrison Loan Agency Service LLC. The agreement is valid through Oct. 15, 2015, and can be extended to Nov. 15, if Joe's does not default and meets the requirements stipulated for selling the entire company or a obtaining a new recapitalization loan that would allow the retailer to pay off all outstanding debt under the CIT and Garrison credit facilities.
The Commerce, California-based business makes jeans, apparel and accessories sold in department stores and company-owned boutiques. The line was started by creative director Joe Dahan in 2001. Currently, the company owns 33 retail stores, including 13 full-priced stores and 20 outlets. The company says it continues to look at further expansion opportunities.
In refinancing mode for a while, the company called in restructuring expert Carl Marks Advisory to explore strategic alternatives earlier in the year. Carl Marks declined to comment for this story, and Joe's did not return a call seeking comment.
The retailer's problems began in 2013, after it paid $98 million (including $65.4 million in cash) to buy Hudson Jeans, a competitor that promotes its apparel as made in America. Before the acquisition, Joe's stayed afloat with cash on hand and through a factoring agreement, but after the deal, the company relied more heavily on the revolving credit facility from CIT and a term loan from Garrison, eventually defaulting on both.
Joe's has yet to integrate Hudson fully, even though it had expected the deal to result in cost savings. In the future, Hudson's manufacturing facilities may be moved from Los Angeles to Mexico, where Joe's manufactures some of its products, which may prove controversial, since Hudson has always touted its domestic production.
"It is necessary for us to integrate the operations of Hudson in order to reduce expenses and achieve the synergies that were expected as a result of the acquisition," Joe's says in an April 9 quarterly filing.
Moss Adams LLP, Joe's accounting firm, raised substantial doubts about the jeans maker’s ability to continue as a going concern, or without the risk of liquidation, because of a working capital deficiency and the loan defaults. For more on the business' financial history, read Another Troubled Retailer, Joe's Jeans, Negotiates With Lenders.
Joe's says its problems are exacerbated by a shift towards non-denim bottoms in the U.S. To keep up with the change, the company started a collection called "OffDuty" that makes products more in line with the non-denim "athleisure" trend dominating storefronts. Denim has lost some market share to other pant styles, including trousers and knit pants, according to retail analytics tool WGSN InStock, which shows that in the past year, non-denim pants are up 27 percent over jeans. "Due to consumers' focus on wellness, activewear apparel and activewear-influenced pieces have become a huge focus for retailers and brands," according to WGSN InStock.
For Joe's, net sales were down earlier this year, to about $43 million for the three months ended Feb. 28, from about $47 million for the same time period the previous year, according to SEC filings. The company's gross profit decreased to $18.1 million for the first quarter of fiscal 2015, from $21.5 million the previous year a 16 percent decrease. The first fiscal quarter of 2015 also gave Joe's an operating loss of about $3.2 million, compared with operating income of $1.3 million for that quarter of 2014.
For the previous edition of Turnaround Tuesday, see Struggling Cardinal Energy Brings in PE Investor.
For a list of troubled companies, check out Mergers & Acquisitions Distressed Company Watch List.