California Apparel News

Sometimes breaking up is hard to do. But Hudson Jeans founder Peter Kim is trying to do just that.

Nearly two years ago, Joe’s Jeans acquired Hudson in a deal worth about $97.6 million in cash and convertible notes. The two Los Angeles premium-denim companies were to be operated separately but under one corporate umbrella.

Now that arrangement has gone sour as Joe’s nears bankruptcy. It has defaulted on millions of dollars in loans used for the merger and even owes Kim and other Hudson stockholders more than $20 million in notes.

Kim alone is owed $14.3 million in notes and is setting the pace to get his company back, sources said.

On Feb. 17, Kim announced his resignation from the board of directors of Joe’s Jeans even though he remains chief executive officer of Hudson.

Kim has retained B. Riley as a financial adviser and Sullivan & Cromwell LLP as a legal adviser to help him weigh his alternatives. The denim executive was not immediately available for comment.

Basically, Kim wants to audit the financial books of Joe’s Jeans, which recently reported a net loss of $27.7 million on $188.7 million in net sales in 2014. In 2013, Joe’s Jeans had a net loss of $7.3 million on $140.2 million in net sales.

Of much more concern is that in late November, Joe’s Jeans defaulted on nearly $94 million in debt, used for the Hudson acquisition. The default was triggered by Joe’s failure to comply with the EBITDA requirement on term loans as of Sept. 30.

The denim company owes $59.9 million to Garrison Loan Service Agency. Because of the default, the interest on the loan goes from 12 percent to 14 percent.

Joe’s also defaulted on its revolving-credit agreement and factoring facility with CIT Commercial Services, which was owed $33.9 million as of Sept. 30. Additionally, Peter Kim and other Hudson stockholders, as well as Fireman Capital Partners, are owed $22.9 million in convertible notes they hold.

Joe’s executives said they were trying to work out the company’s loan problems, but so far no word. “We are currently in discussions with [Garrison] and CIT regarding a resolution to the defaults, including amendments to the existing agreements and waivers for the defaults,” the denim company said. Unless it retains a waiver, the lenders are entitled to “accelerate the outstanding amounts under those agreement[s].”

The loan defaults set in force a chain of events that has kept the apparel industry buzzing about the denim company’s fate. On Jan. 23, Marc Crossman, the long-time president and chief executive officer, was forced out. He announced his resignation but is being retained as a consultant.

In his place, Jay Furrow Jr. stepped in as interim CEO only to resign by Feb. 11. Furrow’s father, Jay Furrow Sr., Joe’s chairman of the board, is now the interim CEO.

Adding to the fiasco, Joe’s Jeans changed accountants in October from Ernst & Young to Moss Adams to go over its financial returns for fiscal 2014, which were delayed. It has also retained Carl Marks Advisory Group to explore strategic and financing alternatives to deal with the company’s debt.

The merger between Joe’s Jeans and Hudson Jeans came about through a surfing-buddy friendship between Kim, who founded Hudson in 2002, and Crossman, who had been the CEO of Joe’s for nine years.

The idea was to take Joe’s sourcing savvy in Mexico, where it now makes about 65 percent of its blue jeans, and help Hudson save money by moving its Los Angeles production south of the border. But that resulted in at least $10 million in returned Hudson jeans last year. Hudson’s revenues in 2014 were around $96 million last year, sources said.

The financial situation at Joe’s Jeans has become so dire that analysts at B. Riley & Co., a Los Angeles investment bank that used to advise investors on whether to buy stock in Joe’s Jeans, has dropped its financial coverage of the company. “At this juncture, we do not believe we can add much value on the equity, given the dire circumstances, and we are discontinuing coverage,” B. Riley analyst Jeffrey Van Sinderen wrote in a Feb. 17 report. “With no re-fi deal reached and no suitor for the company having emerged, we do not see the company continuing to operate in its current form. It appears that some sort of restructuring will be necessary.”

In an interview Van Sinderen said, “Both the brands are good brands. But I think Joe’s Jeans has been financially mismanaged.” λ