California Apparel News

It all started early this year, when Charlotte Russe Holding Inc. buyers rolled the dice and gambled. For pre-Fall, they decided to bring in a larger mix of subdued merchandise marked by a muted-color palette rather than totally embrace the bold, bright colors being sold by other retailers catering to the juniors market.

When teens hit the Charlotte Russe stores in June to peruse the clothing rounders, those neutral tones didn’t translate into big sales. During the three months ending June 26, same-store sales skipped a beat, dipping 6.5 percent from the same-year-earlier period.

One month later, the company’s longtime chief executive, 59-year-old Mark Hoffman, was out the door. On July 20, days before a national conference call was scheduled to discuss the company’s third-quarter earnings results, Hoffman abruptly announced he was retiring after seven years with the San Diego–based retailer, which is named after a French dessert.

Now the company is in search of a new chief executive and a way to earn back customers in one of the most challenging retail climates experienced in recent years. The company’s stock is trading at around $13, slightly above its 52-week low of $12.05 on July 24 and far from its 52-week high of $20.61 on Feb. 25.

“There are some definite challenges out there, but the business isn’t broken,” said Liz Pierce, an analyst who covers Charlotte Russe for Roth Capital Partners in Newport Beach, Calif. “We are just in a very difficult retail environment, heading into the most important time of the year with significant headwinds.”

Like most mall-based chains, Charlotte Russe has been fighting for every sales dollar it rings up. Even though net sales rose 12 percent during the first nine months of this fiscal year to $616.5 million, the company’s net income declined 11 percent to $24.5 million, compared with the same period last year. Still, the company had a profit, and it has no long-term debt.

But already, Charlotte Russe executives estimate that same-store sales during the next three months will be down. Interim Chief Executive Leonard Mogil, a board director since 2001 who has stepped in on a temporary basis, noted that he expects comparable-store sales to slide by single digits during the company’s fourth quarter. “That said, our merchants feel positive about our Back-to-School assortments that arrived in stores this week [July 20],” Mogil said in a conference call.

When store executives saw their June merchandise falter, they quickly started taking markdowns and rushed in Fall goods.

Teeny-bopper competition

Charlotte Russe was founded in 1975 by three brothers—Dan, Frank and Larry Lawrence— who grew up in the retail business in Brooklyn, N.Y. They opened their first store in Carlsbad, Calif. The concept grew slowly over the next 20 years into a 35-store chain and was acquired in 1996 by investment firm Saunders, Karp & Megrue and Bernie Zeichner, Charlotte Russe’s chief executive at the time. The company went public in 1999, trading on the NASDAQ market.

The retail chain has exploded in the last 12 years to 468 stores in 45 states, with a good concentration in California and Florida. Rapid growth and annual sales approaching $1 billion a year have prompted the chain’s executives to mull over launching a new store concept that would be different from Charlotte Russe but add depth to the business. Store consultants have been working with the corporate office for the past six months, but the weak economy has put the new store concept on the back burner until the retail climate looks hotter.

“They have plenty of growth in their core concept; now is not the time to focus on a new store concept,” observed Jeffrey Van Sinderen, an analyst who covers Charlotte Russe for B. Riley & Co. in Los Angeles.

In the past, Charlotte Russe has tried to launch other new store concepts, but it hasn’t been that successful. In 1997, the San Diego–based retailer bought 16 stores from Los Angeles–based Rampage Clothing Co., founded by Larry Hansel, who made sportswear and dresses for juniors and children. In 1993, Hansel expanded into the retail business by buying Judy’s Inc., which had 62 stores, as part of a bankruptcy reorganization. Hansel kept 40 of the Judy’s stores and converted them into Rampage stores.

By 2006, Charlotte Russe had 63 Rampage stores that were shuttered when the company sold 43 of its leases and converted 21 stores to the Charlotte Russe nameplate. The other stores were closed.

In 1999, the company experimented with a store concept called Charlotte’s Room, which had a small selection of apparel and everything that would decorate a tween’s room. Those 10 stores were closed in 2003.

Of more immediate concern are competitors such as Forever 21, the Los Angeles–based retailer founded in 1984 by Don Chang. The young men’s and young contemporary retailer, with about $1.8 billion in projected sales this year, is on an aggressive expansion plan, blowing up store footprints to as much as 60,000 square feet to be able to carry more merchandise and in-house labels. Forever 21 opened 14 mega-stores in 2007 and has plans for at least 15 such stores in 2008. Charlotte Russe stores average about 7,100 square feet.

“Their biggest competitor is Forever 21,” said Samantha Panella, an analyst who covers Charlotte Russe for Raymond James & Associates Inc. “Based on my mall checks, Forever 21 is very busy. Forever 21 seems to capture a wider age range. I will see teen-agers shopping with their moms.”

Panella said Charlotte Russe needs to make its stores more productive so they can leverage their costs.

There are also new competitors on the fast-fashion scene. European retailers such as H&M, Zara and MNG by Mango have been rapidly entering the U.S. retail arena, often occupying the same malls as Charlotte Russe. Topshop, the London fast-fashion retailer, is opening its first U.S. store in New York in October.

“With so many players in the fast-fashion sector, such as Zara and Forever 21, you constantly have to be on top of your game because the shoppers are really selective, and they are comparison-shopping in the malls all the time,” said Betty Chen, an analyst who covers Charlotte Russe for Wedbush Morgan Securities.

One issue cutting into earnings is the burgeoning price of apparel made in China and rising freight costs to ship goods across the ocean. Patti Johnson, Charlotte Russe’s chief financial officer, said the company doesn’t feel it can hike apparel prices right now to recuperate those added costs.

So to bring sales and profitability up, Charlotte Russe executives are planning on concentrating on stronger branding, an assortment of apparel, inventory control and making the most of their capital.

E-commerce is another solution. The retailer was late in joining the Internet world, only launching a commercial Web site within the last year. Web sales in the first year are expected to total $6 million. “Their site is still a work in progress,” said Pierce, the analyst with Roth Capital. But there is potential to reach customers in areas that don’t have Charlotte Russe stores or to send e-mail blasts to loyal shoppers about new products.

All these issues will have to be addressed by a new chief executive. The company has enlisted a hiring firm to head the search for someone to take the top spot. “It’s a great opportunity for someone to come in and effect a turnaround,” said Wedbush Morgan’s Chen. “The board wants to find the right candidate with the right mix of merchandising knowledge and operational discipline. And that is a unique person.”

More Charlotte Russe Execs LeaveAlmost two weeks after the retailer’s chief executive abruptly retired, two other executives said they would step down.

Patti Johnson, chief financial officer, and Patti Shields, vice president and general merchandise manager, announced on Aug. 1 that they would be leaving the company, effective Aug. 14.

Meanwhile, Edward Wong, executive vice president and chief supply-chain officer, was named chief operating officer.