Jeans firm got too big for its britches: Blue Holdings' plan for expansion comes apart at seams.

Last year, Blue Holdings Inc. had some grand plans.

The Commerce-based premium denim company acquired a 50 percent stake in a trendy sportswear line called Life & Death. Bidding to move aggressively into retail, it also tried to buy an East Coast retail chain for $32 million to spread its brands nationwide.

But the acquisition of Long Rap Inc., the Washington, D.C.-based chain operator that owned 25 Up Against the Wall stores across several states, fell through in October. And while the Life & Death apparel line was a hit with fashion reviewers, it's being dropped amid lackluster sales.

And as if to punctuate the failure, the company announced last week the closure of its only two existing retail outlets--and a 25 percent workforce cut.

"Sales have been down. They haven't been profitable," said Eric Beder, an analyst with New York-based Brean Murray Carret & Co., and the only equity analyst that regularly covers the firm. "They need to right-size the company to a lot smaller than they are now, to draw back to make this more solvent."

The numbers tell the story.

Blue Holdings' stock, which topped $25 two years ago, hit an all-time low price of 60 cents on Sept. 20. And second quarter net income was less than $8,000 for the second quarter, down from $1.7 million for the same period last year.

It's not as if Blue Holdings has lines of only unpopular apparel. Its Antik Denim and Yanuk brands are considered strong. However, the onetime fast growing company appears to have fallen victim to a common problem: managing growth, especially amid stiff competition in the premium denim sector, which is now consolidating.

The company is still suffering from a number of late deliveries of the company's Taverniti So and Antik Denim brand jeans in June and July of 2006. The deliveries caused cancellations on key accounts and loss of re-orders.

"Blue had trouble getting products through its infrastructure to stores and they are still suffering from that," Beder said. "Vendors get scared away from ordering additional inventory from the company if shipments are late."

Retrenchment strategy

The retrenchment is part necessity and part strategy. In July. the company hired Glenn Palmer, a former executive at Cerberus Capital Management, a private investment firm, as its new chief executive.

Palmer. who took over for Paul Guez, still serving on the board of directors, said the company would reformulate its strategy and try retail again in the near future.

"The size of the stores and the performance of the stores didn't equate to the financial contribution that we would have planned or expected," he said. In the meantime, Blue Holdings plans to function strictly as a manufacturer and wholesaler.

"We are a public company and in effort to improve the performance and improve shareholder value, these were strategic steps we made to achieve those goals," said Palmer. "We want to diversify outside of denim, but first we are going to gain further penetration in the market we are already in. We are reinvesting capital in our core brands."

The stores in Los Angeles and San Francisco will be closed in the next few months, and Beder questioned whether it would make sense for the company to try to be a retailer again, until they diversify their product offerings.

"If you were to go beyond jeans and be a true lifestyle brand, a store is a huge advantage," he said. "True Religion is rolling out a store because they want to roll out shoes, bags, jewelry, and perfume. But if you are primarily selling denim, it's not practical to have your own stores."

However, premium denim sales are still strong. Sales in the sector rose 45 percent for men's and 24 percent for women's this year, according to market research firm NPD Group. But the number of players is diminishing as the sector matures and department stores and other retailers begin to stick with brands they know will sell.

"L.A. is the denim capital and it is over-saturated and only the strong survive," said Kellie Kefalas, a market analyst with retail consultant Directives West. "So right now the key players are the ones who have been around: the Seven's, Citizens of Humanity, Joe's Jeans, Paige Denim."

Palmer agreed that the market is challenging. "There has been retail consolidation and a difficult retail environment," Palmer said. "It becomes more challenging for any denim manufacturer or wholesaler to be successful."

Still, Beder has a buy rating on the stock, and said that he is optimistic about the future of Blue Holdings. Some of that may be based on Palmer's history of overseeing successful turnarounds. While at Cerberus, he was president of Rafaella Apparel Group, where he led a $172 million debt financing.

"There are really no sacred cows in what they cut or who they cut," said Beder. "If they can get the top line going again, it could be interesting for investors. They set it up to become profitable, and it has the ability to become materially profitable.

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