Nitches, Inc.

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Nitches, Inc.

10280 Camino Santa Fe
San Diego, California 92121
U.S.A.
Telephone: (858) 625-2633
Fax: (858) 625-0746
Web site: http://www.nitches.com

Public Company
Incorporated: 1973 as Beeba’s Creations Inc.
Employees: 32
Sales: $29.5 million (2002)
Stock Exchanges: NASDAQ
Ticker Symbol: NICH
NAIC: 422330 Women’s, Children’s, and Infants’Clothing and Accessories

Nitches, Inc. is a San Diego, California wholesale clothing company, catering primarily to women. It both works with retailers to develop clothing lines and develops its own clothing lines for 41 federally registered trademarks, such as Adobe Rose, Body Drama, and Southwest Canyon. Almost all of the garments are manufactured overseas, then imported in bulk to San Diego where they are sorted and packed, and distributed to customers. Nitches’ major retail customers include Cavandars, Kohl’s, Mervyns, Sears, and Sheplers. Orders are solicited from the company’s showrooms in New York and Los Angeles, as well as through 19 independent sales representative organizations.

Founding the Company in 1973

Nitches’ founder and longtime chief executive and chairman was Arjun C. Waney, who grew up in a wealthy family in Bombay, India. He came to the United States to study at the University of California at Berkeley, but after leaving school in 1963 was unable to work legally on his student visa. Instead, taking advantage of contacts in his native country, he began to import blouses and shorts from India and sold them to students. After borrowing $80,000 in 1965 he established two specialty import retail chains: Import Cargo Inc. for the European market and Cost Less Imports Inc. for the West Coast of the United States. The businesses grew rapidly and were acquired by Pier 1 Imports Inc., at one point making Waney Pier l’s second largest shareholder. In 1973 he and a minor partner, Eugene Price, established the predecessor to Nitches, a San Diego apparel importer and wholesale distributorship they named Beeba’s Creation.

Beeba’s focused on women’s fashions, essentially manufacturing knockoffs of popular clothing, using cotton as the primary material. As a result, the company performed better with its spring and summer lines. Most of the manufacturing took place in India, where Waney relied on businesses connected to his family. Not only did his relatives have stakes in many of the plants Beeba’s used, they also owned a number of large textile mills. Early on the company was able to sign Penney’s as a major customer, at first providing woven goods. (In 1984 Beeba’s would begin to supply Penney’s with knitwear.) Although outsourcing manufacturing to overseas plants lowered overhead and allowed Beeba’s to maintain inexpensive retail prices, the company began to face clothing import restrictions in certain countries in the early 1980s. As a result, Beeba’s began to diversify its sources, in particular cutting back on manufacturing in India, which in the early 1980s still accounted for the production of more than 80 percent of the company’s goods.

Beeba’s annual sales stood at $15 million in fiscal 1980, resulting in net profits of $166,000. Four years later revenues totaled nearly $34 million and net profits exceeded $1 million. The company was now growing so rapidly that it simply lacked the capital to properly fund the business. In 1984 Waney began making preparations to take Beeba’s public. The company also had been used as a vehicle for some nonclothing investments, which were now divested in order to make Beeba’s a pure-play venture. For instance, Beeba’s sold off its stake in The Perfect Pan restaurant chain. In 1985 the initial public offering (IPO) took place, with the company netting almost $6.5 million and insiders more than $3.1 million.

Launching the Body Drama Subsidiary in 1985

Infused with cash, Beeba’s made efforts to expand its business in a number of directions. In 1985 it established Body Drama, an idea brought to Waney by Cecelia Post, who then became president of the division. Post’s concept was to market sportswear-inspired intimate apparel, such as nightshirts, nightgowns, pajamas, teddies, and robes. The innerwear division relied on two labels, Body Drama and Body Tease. In 1986 Beeba’s looked to move beyond its role as an importer and began to invest in manufacturing in Costa Rica, Jamaica, Mexico, and Morocco in order to circumvent import restrictions. By now the company was growing at an impressive clip, topping $94 million in annual revenues for fiscal 1986, a significant improvement over the $46 million posted the year before. Net profits also increased from $1.76 million in fiscal 1985 to $3.2 million in fiscal 1986.

A major customer, Penney’s, established an important partnership with Beeba’s in the spring of 1987, agreeing to purchase a 20 percent stake in the business at a cost of more than $19 million. Beeba’s was expected to be a major factor in Penney’s move into the specialty shop business. These shops within the large department stores were to target 18- to 30-year-old working women. Not only was Beeba’s to supply 60 percent of the merchandise for these shops, it would be able to take advantage of its ability to sense trends and capitalize on it by influencing the shops’ product mix. (In some cases, however, rivals objected to some of Beeba’s imports, which they believed too closely resembled their own designs. More than once in the mid-1980s Beeba’s was sued for copyright infringement.) Beeba’s also looked to Penney’s, as well as other major customers such as Wal-Mart and Ross Stores, to support its new men’s division, established in mid-1987.

Due to a number of factors, Beeba’s momentum stalled during fiscal 1988, resulting in a $4 million net loss on $102.4 million in sales for the year. For one, the company’s investments in manufacturing did not work out, with start-up costs running much higher than expected. As the company backed away, shutting down one factory and selling its stake in another, it was forced to take a $5 million writedown. In addition, the fashion industry in general failed to offer new design trends to consumers. A concerted effort to bring back the miniskirt was a costly failure across the board. Beeba’s also was hurt by the stock market crash of October 1987, after investing much of the money gained in the sale of stock to Penney’s in what management considered safe, short-term securities. The crash also had an adverse effect on retailers, who delayed placing advanced orders on merchandise. As a result, Beeba’s was forced to discount its inventory. Beeba’s stock dropped in price during the crash, but failed to recover, so that by the spring of 1988 the company was regarded as a ripe takeover candidate, a situation that persisted for more than a year.

In July 1988 Waney stepped aside as CEO of Beeba’s, although he retained the chairmanship. Succeeding him was Steven P. Wyandt, who had been an officer of the company since 1985, and prior to that time had served as a consultant. He came to Beeba’s with 17 years of experience with Jockey International, White Stores, and Pier 1 Imports. Under his leadership the company quickly took steps to correct the problems that had led to the fiscal 1988 losses. Aside from pulling back from its move into manufacturing and investing its excess cash in commercial paper, Beeba’s decided to cater to its larger and more stable customers, such as Wal-Mart. As a result, in fiscal 1989 revenues rebounded, totaling $128.6 million, and the loss of the year before was reversed, with Beeba’s now posting a net profit of $4 million.

As impressive as 1989’s turnaround may have been, however, Beeba’s faced new challenges in 1990, as both the economy and the weather combined to stall the company’s momentum. An unseasonably long and cold winter hurt retailers in general, and several of Beeba’s customers in particular. Federated Department Stores, Allied Department Stores, and Ames Department Stores filed for bankruptcy protection. Again, Beeba’s was left with excess inventory, which it then had to mark down in order to liquidate. Despite posting record sales of $158 million in fiscal 1990, Beeba’s once again found itself reporting a loss on the year, this time $3.4 million.

The Body Drama division remained successful and was Beeba’s most recognizable line. From its founding in 1985 to 1991 the division experienced a tenfold increase in annual revenues. Beeba’s sought to take advantage of Body Drama’s position by spinning it off as a public company. Beeba’s retained a controlling stake in the business and was also able to charge Body Drama for certain corporate services, but perhaps of more importance was the cash the company realized in the IPO. Much of those proceeds were used to complete a buyback of stock from Penney’s, at a price far below what the retailer paid several years earlier. Although Penney’s remained a major account, Wal-Mart by now had eclipsed it as Beeba’s largest customer, providing 23.8 percent of sales. In fiscal 1991 Beeba’s once again bounced back to profitability, recording net income of $2.7 million in spite of revenues that fell to $132.3 million. The success was the result of reducing administrative costs by some $7 million, shutting down a poor performing beachwear line, and cutting inventories from $24.2 million to $9.9 million. With the country suffering through a recession, however, Beeba’s immediate future was uncertain.

Company Perspectives:

Apparel designers and retailers alike choose Nitches to fulfill their manufacturing needs. From fabric selection and financing to garment manufacture, Nitches provides the services and support that deliver stylish, quality, affordable apparel to stores across the country.

Beeba’s hoped to find renewed success with an emphasis on western wear for younger women and sportswear for larger sizes and children, as well as to make inroads with membership warehouse clubs, but higher cotton prices and economic conditions caused the company to experience steady erosion over the next few years. Body Drama was especially hard hit, leading to losses and the resignation of its CEO-founder. Unable to find a buyer for Body Drama, Beeba’s decided to take the company private. A shareholder lawsuit ensued, essentially accusing the parent company of intentionally depressing earnings to lower Body Drama’s stock price in order to rebuy the company on the cheap. In the end, the contending parties settled the matter without going to trial. More than just the Body Drama unit was experiencing difficulties, however. In fiscal 1994 Beeba’s returned to red numbers, posting a loss of nearly $3.4 million, which led to a complete reorganization of the business.

Company Considering Selling Itself in 1995

Early in 1995 Beeba’s retained Wedbush Morgan Securities, a Los Angeles-based investment bank, as a financial adviser to help it find a buyer for its stock or assets. Management ultimately decided to downsize, reducing lower-margin product lines in favor of more profitable ones. In August 1995 Beeba’s sold a number of assets, including its junior sportswear line, girls’ wear, and maternity woven and knit tops and bottoms lines to Design & Source Holding Co. Ltd. It later sold the remaining inventory of these lines to the buyer at cost, as well as granting an exclusive worldwide license to use the trademarks associated with these products. Also as part of its downsizing efforts, Beeba’s moved its administrative and warehouse operations to a much smaller facility. In late 1995, to help make a break from its past, Beeba’s changed its name to Nitches, Inc. Waney also began to step even further away from the active running of the business, completely turning over operational control of Nitches to Wyandt. Waney now shifted his focus to his investment fund, Argent Fund Management Limited, which he ran from London where he now lived. Waney remained chairman of Nitches’ board for several years, before relinquishing that role as well to Wyandt, although retaining the title of chairman emeritus.

As a result of the company’s downsizing efforts, revenues fell from $83.8 million in fiscal 1995 to $54.4 million in fiscal 1996. Net income, however, improved from $214,000 to $1.4 million. The downsizing trend continued in 1997, as revenues fell to $48.4 million, but because of poor dress sales profits were only $195,000. Shortly after its fiscal year ended in August 1997, Nitches sold off its dress product lines. In January 1998 the company also decided to eliminate its activewear product lines. With the loss of some $14 million in revenues contributed by these two lines, Nitches saw its 1998 sales bottom out at $31 million, the company little more than a break-even concern. Nitches began to rebound in fiscal 2000, with the sale of private-label sleepwear helping to offset discontinued lines and boost sales to nearly $40 million. Nitches also recorded a $1.9 million profit for the year. Once again, however, a sluggish economy intervened to blunt the company’s growth. Revenues fell by $5.8 million over the previous year, but Nitches was still able to produce net income of $1 million. Poor economic conditions continued in 2002, however, and sales fell below $30 million, leading to further challenges for the company.