To Survive Downturn,
Citizens Of Humanity
Sacrifices Some Sales
Could Be 2011 Until It Considers
Liquidity Event, COO Says
By Richard Collings
Citizens of Humanity, the Huntington Park, California-based denim brand, “took some lumps concerning its sales,” sacrificing a bit of its topline, or revenues, so that it could maintain price points and margins through the downturn, according to Chief Operating Officer Gary Freedman.
He conceded that the company’s revenues are down year-over-year, though he declined to comment more specifically, as it is a private company. But to say the denim maker hasn’t been affected by the recession wouldn’t be honest, he said.
Freedman said that the producer of premium denim finds it is more financially feasible to have its sales take a hit, rather than maintain previous production levels, leading to mark downs to move the excess inventory, giving up profits in the process.
Freedman said, for example, that a company would be better off to let revenues decline roughly 20-to-30 percent, rather than steeply discount to keep moving product. Although steeply discounting may maintain sales, it can ultimately lead to a lot of red ink. “We don’t try to stuff the supply chain,” he explained
The company is able to achieve this in part because it manufactures domestically, and allows retailers to order product closer to the time of delivery so that they can more accurately meet current demand, and are not left with unsold goods they have to liquidate. The company “lets demand pull us,” Freedman said.
Citizens of Humanity can fill an order in six days, a quick turnaround time that allows it to meet demand as it occurs. Although domestic production serves the premium apparel market well, mass merchandise manufacturing will continue to migrate overseas, Freedman interjected.
It’s not that you won’t find Citizens of Humanity’s products on sale at places such as Nordstrom Rack, but the company does not do anything to subsidize such sales, nor make product specifically for department stores to mark down.
Such a strategy has served the premium denim brand well during the recession, Freedman said, and although the company has felt the downturn’s effects, and agrees that the category is not as robust, it believes it has gained greater market share as other similar companies falter, and will reap the benefits once the economy recovers.
Freedman said the company builds goodwill with its customers by having the same pricing year-round at all of the retailers that carry Citizens of Humanity.
He also said the company, by not having its own stores, is under-distributed, so appeals to retailers as a brand they can put on their shelves to distinguish themselves. Citizens of Humanity, as a result, is not over saturating the market.
Freedman, however, said the company wouldn’t rule out changing its strategy in the future concerning having its own retail stores, or to more aggressively pursue direct-to-consumer, or internet-based retailing.
The denim brand realizes that consumers are not going to purchase what they already have, and is able to differentiate by utilizing innovative fabrics, and by operating its own laundry based in Los Angeles, which employs several hundred people, so that the details and finishes on each pair of jeans are unique.
Freedman estimates it costs the company about $20 for a single wash per pair of jeans. Quality denim fabric, such as what it acquires through an exclusive agreement with a mill in
Citizens of Humanity developed a super-stretch fabric that the company has exclusive rights to--the kind of fabric style forecasters have recently touted as the new trend in denim, Freedman added.
As to when the economy will recover to the point that credit flows more easily, valuations begin to increase, and the stock market is more welcoming for an initial public offering is a wild guess, he said.
In the case of Citizens of Humanity, it will eventually seek some sort of liquidity event, perhaps a sale, but likely not until at least 2011, Freedman stated.
For now he doesn’t expect many acquisitions as companies that would likely do most of the acquiring need to recover themselves. But Freedman said premium denim is an entrenched category that takes a certain expertise or set of skills to competently produce, with each finish requiring a different fit, for example.
Premium denim companies that survive the downturn, and emerge with a solid customer base and that expertise intact, will likely be attractive acquisition candidates for some of the large luxury goods businesses, Freedman said.
Potential acquirers, though, will be more cautious in the deals they execute and will not likely pay the stratospheric multiples companies in the category once achieved, he added.Citizens of Humanity sold a minority stake to private equity firm Berkshire Partners, based in