Frederick's of Hollywood, Inc.
Frederick's of Hollywood, Inc.
Sales: $200 million (2002 est.)
NAIC: 448190 Other Clothing Stores; 454111 Electronic Shopping; 454113 Mail-Order Houses
Frederick's of Hollywood, Inc. is a leading U.S. intimate apparel retailer, with an emphasis on racier clothing and other items. Through about 160 mainly mall-based stores, a mail-order business, and an online shopping site, Frederick's sells lingerie, bras, and panties, as well as sportswear, dresses, swim-wear, shoes, hosiery, accessories, and a line of menswear. Increasing competition from upstart lingerie retailer Victoria's Secret hurt the company throughout the 1990s, and Frederick's finally was forced to file for Chapter 11 bankruptcy protection in July 2000. Following a thorough restructuring, the firm emerged from bankruptcy in January 2003, majority owned by a consortium of creditors led by Crédit Agricole, a French investment bank. In an attempt to differentiate itself from Victoria's Secret and other competitors, Frederick's has repositioned its product line to appeal to younger women by returning to a racier image—but not to the raunchy image on which the company made its reputation.
The company is named for its founder and longtime president Frederick Mellinger, who conceived of his lingerie business while serving in the armed forces during World War II. In 1946, after his discharge, Mellinger established a mail-order undergarment operation in New York City. Known as Frederick's of Fifth Avenue, his shop offered racy black bras and panties embellished with lace and appliqués.
Mellinger took his fancy foundations to more permissive California in 1947, changing the name of the catalog business to Frederick's of Hollywood that same year. Tinseltown's glitz and glamour provided the perfect backdrop for the ground-breaking retailer, and a parade of starlets and models provided a ready customer base.
Mellinger, who came to be known as "Mr. Frederick" among his clientele, soon began to specialize in figureenhancing foundations and accessories. He designed and began selling the first push-up bra, dubbed the "Rising Star," in 1948. Fanny pads, girdles, sky-high heeled shoes, hosiery, wigs, false eyelashes, even head pads to achieve the illusion of height—anything necessary to achieve "Frederick's figure balancing act"—followed in the years to come. The company even offered an inflatable bra that came complete with a "free straw." The catalogs and stores later added glamorous evening wear, much of it designed by Mr. Frederick himself. The garments featured daring necklines, high slits, and sheer fabrics intended to appeal to men as much as women. In fact, Mellinger once wrote that his goal was to offer "the most alluring, body-hugging, figureenhancing outer fashions … always aimed at men."
Mr. Frederick opened his first retail store in California in 1952 and others soon followed. The flamboyant Art Deco flagship store soon became known as "the purple palace." Mellinger started advertising his catalog and garments in nationally circulated magazines using saucy tag lines such as "Fashions Change—But Sex Is Always in Style." It was Frederick's that brought French bikinis to the United States during the 1950s. After incorporating in 1962, Frederick's continued to expand its product offerings in the sexually permissive environment of the 1960s and 1970s. Soon pasties, anonymously written sexual guides, and other "sexually oriented non-apparel products" appeared in the catalogs.
Although Frederick's offered its stock to the public in 1972, the Mellinger family continued to control a majority of the company's stock through the early 1990s. By the end of the 1970s, the chain had expanded to more than 150 stores, accounting for over half of overall sales. The company enjoyed peak prosperity during the mid-1970s. Sales more than doubled, from $9.7 million in 1971 to $24 million in 1976, while net income tripled, from slightly less than $500,000 to $1.5 million. It was to be Frederick's highest-ever level of profitability, as a combination of societal changes and management problems converged on the lingerie retailer.
Americans' sexual mores and their tastes in lingerie grew increasingly conservative in the 1980s. The septuagenarian founder and his management team, however, were slow to realize these trends. (Unbeknownst to the board of directors, in fact, Mellinger was afflicted with Alzheimer's disease during this time.) While company sales rose from $39.3 million in 1981 to $45.3 million in 1984, net profits slid from a high of $2.2 million to $627,000. This dramatic decline in profitability was reflected in the company's eroding stock price, which dropped from $7 per share in mid-1983 to less than $2 by mid-1985. By the time Mellinger retired in September 1984, his company had experienced its first-ever loss, a $148,000 shortfall on sales of about $45 million. In 1985, Forbes magazine's Ellen Paris speculated that Frederick's dip into the red meant that sex must be "going out of style." Nevertheless, when Mellinger died in 1990 at the age of 76, he was praised as a brave pioneer of intimate fashions and groundbreaking foundations.
In May 1985, after a short period of leadership under interim managers, Frederick's board of directors hired former Carter Hawley Hale home furnishings division chief George Townson to take the reins at Frederick's as chairman and CEO. Townson brought two decades of experience in mail-order retailing, although none of it was in apparel, let alone lingerie.
From Raunch to Romance in the Late 1980s
It did not take Townson long to pinpoint Frederick's problems. He later enumerated the shortcomings to Direct Marketing 's Mollie Neal: "Outdated business assumptions, deteriorating conditions of our stores, ineffective management, inadequate merchandising and financial reporting systems, a dwindling core customer base, more sophisticated competition, archaic structures and antiquated policies." The new CEO immediately mapped out a ten-year plan for what he called the "desleazification" of Frederick's.
Store renovations shunned the traditional garish purples and hot pinks for more subtle lavenders and mauves, while softer lighting and new carpeting in the stores made for a more romantic, less burlesque atmosphere. The high-profile, $300,000 renovation of the "purple palace" was a prime example of this physical repositioning. Not only did the company redecorate—including covering over the outrageous lavender facade with gray paint—but it also celebrated its heritage with the opening of the world's first Lingerie Museum, featuring some of Frederick's earliest designs as well as undergarments of the stars. Los Angeles Mayor Tom Bradley declared "Frederick's of Hollywood Day" on the occasion of the grand reopening, November 8, 1989. The vast majority (80 percent) of Frederick's nearly 200 stores had been redecorated by 1991.
CEO Townson hired marketing consultant Walter K. Levy to assess the company's product line and target audience. A new merchandising scheme emerged from his observations. Frederick's pared what had become an excessively broad and (in the eyes of many Americans) lewd line, dropping such items as explicit videos and bawdy games. Frederick's stores also stopped carrying certain lines of apparel and accessories, including wigs, sportswear, and swimwear (although these last two categories continued to be offered in mail-order catalogs). At the same time, the company expanded its loungewear and men's undergarment lines.
The revamp—or, as many company observers punned, "devamp"—of Frederick's of Hollywood catalogs also focused on bringing the publication out of the fringes and into the mainstream. Even into the 1980s, the catalogs had featured explicit black-and-white photos interspersed with exaggerated and cartoonish line drawings. The new catalogs featured heavier paper, a new logo and motto ("An Intimate Experience"), and tasteful color photographs of models wearing Frederick's lingerie. Although catalog sales slid by about 5 percent with the first new issue, they quickly began to recover, with sales and profits gaining by double-digit percentages in the latter years of the decade. Frederick's move away from mail-order's "red-light district" enabled it to buy mailing lists from catalogers who would have previously been embarrassed to be associated with the lingerie merchant. As a result, catalog circulation more than tripled from 7.5 million in 1985 to 26 million by 1990.
- Frederick Mellinger establishes a mail-order lingerie business in New York City called Frederick's of Fifth Avenue.
- Mellinger relocates the business to California, renaming it Frederick's of Hollywood.
- Mellinger designs and begins selling the first push-up bra, dubbed the "Rising Star."
- The first retail store opens in California.
- The company is incorporated as Frederick's of Hollywood, Inc.
- The company goes public, but the Mellinger family continues to own a majority stake.
- Frederick's suffers a net loss for the year, its first ever; Mellinger retires.
- George Townson is brought onboard as chairman and CEO and launches a "desleazification" of Frederick's.
- The company launches an online shopping site.
- Investment bank Knightsbridge Capital Corp. takes Frederick's private in a $66.6 million leveraged deal.
- Linda LoRe is named president and CEO.
- Knightsbridge sells the company to investment firm Wilshire Partners; burdened by debt, Frederick's files for Chapter 11 bankruptcy protection.
- The company emerges from bankruptcy under the majority ownership of a consortium of creditors led by Crédit Agricole, a French investment bank.
Behind the scenes, CEO Townson purged the executive ranks, bringing in 18 new managers within his first two years at the top. He also invested in new computer hardware, including cash registers and data processing equipment and software. Frederick's retail rebirth clearly followed the lead of upstart competitor Victoria's Secret, a subsidiary of The Limited Inc. By 1988, Victoria's Secret had more than triple the annual sales volume with about the same number of stores. But while Frederick's had shed much of its most explicit merchandise and imagery, the company still managed to maintain its "naughty" cachet. Townson reflected on this factor in a 1996 interview with Marianne Wilson of Chain Store Age Executive magazine, noting, "Generally speaking, Victoria's Secret is more mainstream and romantic. Frederick's is fun and sexy." The new CEO's turnaround was effective and quick. Frederick's sales more than doubled from $45.2 million in 1985 to $114.1 million in 1991 and profits burgeoned to a historic high of $5.2 million.
Furtive Growth in the Early 1990s
Sales increased from $117 million in fiscal 1992 to nearly $143 million in 1995, while profits declined from $5.1 million to a loss of $903,000 in 1994, then rebounded to $2.7 million in 1995. Townson blamed Frederick's difficulties on rising postage and paper costs, a generally soft retail environment, the severe recession in California (where the company had a heavy concentration of stores), and increasing competition. Indeed, Townson's 1995 letter to shareholders noted that "department stores, mass merchandisers and specialty stores have significantly expanded their intimate apparel lines." By this time, Victoria's Secret alone had $1.8 billion sales and 600 retail outlets.
In 1995 the company made its first international foray, circulating a holiday catalog in Canada. In 1996, the year the company celebrated its 50th anniversary, Frederick's rolled out a new store prototype. The new design was slightly more sophisticated than previous formats, aimed to be more customer friendly, and was nearly twice as large as the existing average outlet—2,300 square feet versus 1,200. The company also introduced a new cosmetics line, but it did not perform well and was soon abandoned. Late in 1996 the company launched its online shopping site, which generated more than $1 million in sales during its first year.
Going Private in the Late 1990s
In June 1996 the Mellinger family put its 50.2 percent stake in Frederick's up for sale. Frederick Mellinger's widow had died in 1993, and the family members were in need of cash to pay off estate taxes of between $11 million and $12 million that were coming due. This was not a propitious time for a sale, as the stock had fallen 78 percent over the previous three years, from $17.87 per share to $4. Following the company's announcement of a loss of $438,000 for the fiscal year ending in August 1996, the stock dipped below the $4 mark. It rebounded, however, after a strong earnings report of $2.9 million for the first half of fiscal 1997. This laid the groundwork for the board's approval in June 1997 of an offer from investment bank Knightsbridge Capital Corp. to pay $6.14 per share for all outstanding stock, translating into a $52.8 million deal. A brief takeover battle ensued, when Veritas Capital Inc., a merchant banker and private equity investment firm, made competing offers, first of $7 per share and finally of $9 per share. In late September, however, Knightsbridge prevailed with an increased bid of $7.75 a share, or $66.6 million, for two main reasons: To pursue the higher bid from Veritas, Frederick's board would have had to pay Knightsbridge a $4.5 million termination fee, and Knightsbridge had already gained control of a majority of the shares, meaning that it could vote against any competing bids. A shareholder-led lawsuit to block the takeover was dismissed by a Delaware Court of Chancery.
Townson left the company following the takeover, and in December 1997 Frederick's of Hollywood hired its first female CEO. Terry W. Patterson came onboard having most recently served as head of Strauss Discount Auto. Knightsbridge executives felt someone outside the industry was needed to provide a fresh perspective. Patterson did indeed make some significant changes rather quickly, further eliminating some of the stores' and catalogs' sleazier elements and attempting to carry merchandise designed to appeal directly to women rather than to men buying for women. Her stint at the company was short-lived, however; Patterson was abruptly fired in March 1999 for reasons that were never fully disclosed, although it was later revealed that she had built up $22 million in excess inventory—a factor in Frederick's later bankruptcy. In July 1999 Linda LoRe, former president and CEO of upscale fragrance retailer Giorgio Beverly Hills, stepped in as president and CEO of Frederick's.
Reorganizing Under Bankruptcy Protection: Early 2000s
LoRe continued the "mainstreaming" of Frederick's that Patterson had begun, but the financial health of the company soon became the primary concern. In June 2000 Knightsbridge sold the company to Wilshire Partners, a private investment firm based in Newport Beach, California, for an undisclosed price. At this time Frederick's was sagging under the crushing weight of a $70 million debt load, most of which was a legacy of the Knightsbridge takeover, which was devised as a leveraged buyout. It was also losing its long-running battle with Victoria's Secret, whose sales neared the $3 billion mark by 1999—compared with Frederick's approximate revenues of $145 million. Therefore, Frederick's filed for Chapter 11 bankruptcy protection in July 2000 and secured new financing enabling it to maintain operations and continue to revamp its product lines and stores.
Cost-cutting came to the fore over the next few years, and during 2001 alone Frederick's reduced expenses by $6.5 million. Part of these savings came from the closure of more than 40 underperforming stores, bringing the total to around 160 by early 2003. LoRe and the other executives also used the bankruptcy as an opportunity to reposition the Frederick's brand. Knowing that they could not compete head on with the Victoria's Secret juggernaut, they pulled back on the softening of the company's image. At the same time, they had no desire to return to the raunchiness of Frederick's past. They settled for a middle ground, positioning the Frederick's brand, according to LoRe, quoted in Women's Wear Daily, as an "anti-establishment lingerie brand, an alternative brand that is playful, sexy, high quality and affordable." The company also began targeting a younger set of core customers—women in the 18- to 35-year-old age range—through such new products as the Get Cheeky line of boy-style cotton panties introduced in 2002. Also debuting were a new line of gift-packaged body care products called Boudoir Cafe and a fragrance line introduced in the fall of 2003. Yet another new store format was unveiled that same year, a smaller 1,000-square-foot design that, according to Women's Wear Daily 's Kristin Young and Dan Burrows, "resemble[d] a jewel box with a boudoir-style interior decorated in cherry-wood paneling, red velvet drapes and leopard carpeting." The new format was to be rolled out very slowly as funds became available. Finally, Frederick's had traditionally used its catalogs as its main marketing tool, but the company launched an advertising campaign during the 2001 holiday season and continued to place ads thereafter—on bus shelters, on the radio, in print, but not yet on television.
In January 2003 Frederick's of Hollywood emerged from bankruptcy. As part of the reorganization plan, Wilshire Partners gave up its equity, and a consortium of creditors led by Crédit Agricole, a French investment bank, converted some of their debt into an 80 percent stake in the company. With liabilities of just $28.8 million, Frederick's exited Chapter 11 a much stronger company seemingly on the rebound. Observers saw some challenges in the company's future, however. Victoria's Secret also was targeting younger women, and several general apparel chains, such as Abercrombie & Fitch, Express, and the Gap, were launching their own lingerie lines. It also was reported that Crédit Agricole wanted to push for a sale of the company following the exit from bankruptcy, which added another element of uncertainty about Frederick's future course.
FOH Stores; Hollywood Mail Order LLC.
Intimate Brands; Spiegel, Inc.; J.C. Penney Company.
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—April Dougal Gasbarre
—update: David E. Salamie