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Frederick's of Hollywood Forced to File for Chap. 11

Retail: Lingerie chain will remain open while it reorganizes heavy debt incurred when it was taken private three years ago.

July 11, 2000|INDRANEEL SUR | TIMES STAFF WRITER

Frederick's of Hollywood, the 54-year-old purveyor of naughty lingerie, filed for Chapter 11 bankruptcy protection late Monday, an attorney for the company confirmed. The retailer is seeking protection from the heavy burden of debt taken on when it went private three years ago.

The company wants federal court permission to stop repaying nearly $55 million that its previous owner, Chicago investment group Knightsbridge Capital Corp., incurred when it bought Frederick's from public shareholders for about $70 million in 1997. Knightsbridge sold the company last month to Los Angeles private investment firm Wilshire Partners. Terms of that deal were not disclosed.

The debt isn't Frederick's only problem, however. The company must overcome changing shopping habits and a reputation for tawdriness that has allowed rival Victoria's Secret to dominate the specialty market for intimate apparel.

To pay for merchandise and marketing costs for the coming year, Frederick's needs to take out new loans. Under Chapter 11, companies may reorganize their capital structure while being protected from old debts, said Michael Tuchin, the company's bankruptcy lawyer.

The filing is expected to affect neither shoppers nor the 1,200 employees at the company's nearly 200 stores nationwide, including 45 stores in California.

"We will be open for business at all our stores and will have no disruption," said Frederick's Chief Executive Linda LoRe.

Inspired by a pin-up of a scantily clad Betty Grable during World War II, the late Frederick Mellinger founded a women's lingerie store in 1946. The following year he moved the store from New York to Los Angeles. The company expanded into mail-order catalogs and opened retail stores in malls, but was hampered by its reputation as a retailer of sex toys in addition to undergarments.

It lost $840,000 on sales of $148 million in 1996, the last year for which it reported earnings to the public. Since then, its revenue has grown by about 8% annually, executives said, to about $190 million. Earnings figures for recent years were not available.

Those numbers are dwarfed by the $2.1 billion in 1999 sales reported by Victoria's Secret, the women's lingerie division of Columbus, Ohio-based Intimate Brands. Victoria's Secret, unlike Frederick's, has built a line of apparel that's viewed as sophisticated and comfortable, observers said.

"Frederick's of Hollywood is a little bit more racy than Victoria's Secret," said Harry Ikenson, senior retail analyst at Chase H&Q in New York.

LoRe said Frederick's, which has in the last decade curtailed its sales of erotic paraphernalia to focus on apparel, still has room to grow by reminding Americans of the company's role in developing the push-up bra and bringing colored lingerie to the market in the 1940s.

Frederick's, which has traditionally relied only on catalog mailings for advertisement, will embark on a new national marketing campaign using money borrowed after the Chapter 11 filing, LoRe said.

"Do we have a right to take credit for what we've done? You bet," she said.

The company's wholly owned Web site subsidiary, Fredericks.com, was not to be included in the filing. LoRe estimates the Web site has generated $10 million in sales for the fiscal year ending this month.

Still, Frederick's and even Victoria's Secret face growing competition. Discount stores such as Wal-Mart and Target are increasingly popular for undergarment purchases. In a 1999 survey of about 3,000 shoppers, 46% said they bought their underwear most often at discount stores, while only 8% said they bought at specialty chains in or outside of malls, according to figures from PricewaterhouseCoopers.

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