Aca Joe Rebounds Following Bailout by Hong Kong Investors

International influences--negative and positive--have had a great deal to do with the fate of Aca Joe, a trendy men’s clothing chain that is emerging from bankruptcy this month.

In 1985, already in trouble, the company was thrown into near-fatal turmoil by supply problems stemming from the devastating earthquake in Mexico that year. The Mexican factories making Aca Joe’s clothing were unable to get the goods to the stores in the United States.

But now the company seems to be back on track with a fresh start--thanks to a bailout by United Trend Investment, a company formed by a group of Hong Kong investors.

San Francisco-based Aca Joe has been resurrected after 11 months of bankruptcy under the wing of United Trend Investment, which has provided Aca Joe with millions of dollars and hands-on management help in exchange for a 65% stake in the company.

Aca Joe President Harry Kraatz said the company, which specializes in casual clothes made of natural fibers, was actually rescued by a Hong Kong businesswoman named Alice Lam, who had been a purchaser of Aca Joe stock. Lam’s clothing manufacturing company, M.S. Universe Textile, had been making knitwear for the Aca Joe chain and was one of its creditors.

Sent Cash, Adviser

“When Aca Joe was in financial trouble, we hired investment bankers to help,” Kraatz said. “Yet, all along, in our back yard was (Lam), an investor who had invested in us early on.” Last spring, Kraatz said, he called Lam to ask if she would be willing to help bail out the ailing company.

Lam could not be reached to comment for this article, but Kraatz said she not only responded with cash but sent her investment banker, Lawrence Kan, to help Kraatz revive the business.

“United Trend was formed as an investment vehicle to help Aca Joe,” said Kan, who has been shuttling between Hong Kong and San Francisco for nearly a year. When the reorganization plan goes into effect later this month, Kan will serve as Aca Joe’s new chairman and chief executive.

Jeff Werbalowsky, director of the financial restructuring group at the Century City consulting firm of Houlihan Lokey Howard & Zukin, referring to Aca Joe’s bailout by the Hong Kong investors, said, “You are going to see a lot more of this, especially with the current unrest in China.”

According to Kan, turning Aca Joe around is just the first of many business ventures for his company in the United States. “We are looking for new investments,” he said. “America is the new market for us.”

Controlling Interest

Many Hong Kong business people, he said, are preparing for the scheduled takeover of the British colony by China in 1997 and are exploring business opportunities abroad, especially in the United States and Canada.

In exchange for offering Aca Joe a $7-million loan and a new $12-million credit line, United Trend received a controlling interest in the company. The company’s reorganization plan was approved by a federal bankruptcy judge in April.

United Trend’s local financial advisers said that rescuing Aca Joe was an excellent move for the Hong Kong investors.

“United Trend took a totally, totally insolvent company and returned value to creditors and shareholders,” Werbalowsky said. “It was a dream--it is the way bankruptcies are supposed to work.”

He added that the Hong Kong investors realized that Aca Joe “was worth far more alive than dead.”

Retail industry analysts say the revived Aca Joe has a promising future because its stores are in prime locations in upscale shopping malls across the country. Aca Joe’s Los Angeles area stores are in the Westside Pavilion, Glendale Galleria and Topanga Plaza. It also has stores on Pier 39 and in Ghirardelli Square in San Francisco.

“The secret to retailing is simple--location, location, location,” said Ted Kraus, publisher of Retail Leasing Reporter, a newsletter published in Princeton, N.J. “Aca Joe’s biggest single strength is its locations.”

Kraus said Aca Joe suffered by not keeping up with the mercurial trends in fashions, even in the menswear market where changes come more slowly than in fashions for women. The revived Aca Joe plans to expand its line of styles and colors and to add a line of men’s accessories.

Looking back, Aca Joe’s Kraatz said the company faltered due to several problems, including rapid expansion and delays in the flow of merchandise from the factories in Mexico to the stores.

But real disaster struck in 1985 when the deadly earthquake tore up large sections of Mexico City and other communities across a broad swath of central Mexico, disrupting commerce generally and preventing the shipment of Aca Joe clothes to the United States.

At the time, the company, which was founded by expatriate American businessman Joseph Rank, was making all of its natural-fiber clothing in Mexico. Rank, who still owns several Aca Joe stores there, is no longer associated with the company’s management.

Even while Aca Joe’s supply problems were intensifying, the company continued to sell franchises, growing from four stores to 100 in 1985 and 1986.

Management Errors

“We grew too fast,” Kraatz said. At its peak, Aca Joe had 115 stores across the country. Today, it has 80, with 46 company-owned stores and the rest owned by franchisees.

Kraatz, 39, is a former Chicago police officer whose previous business experience came from selling Swensen’s ice cream store franchises and working for the Commercial Bank in San Francisco.

Kraatz said he made several management errors that were compounded by his lack of retail experience. After the earthquake, he faced another major problem when the company turned from Mexico to Hong Kong to seek a new manufacturer for its clothes.

“We went to Hong Kong and learned that the factories needed a six- to eight-month lead time--and cash up front,” Kraatz said. This blow came at a time when both time and money were scarce. He said it was also difficult for Aca Joe, as a newcomer, to compete with established companies such as the Gap for space in East Asia’s busy manufacturing facilities.

Soon, it appeared that filing for bankruptcy was the only course for the company, which posted $24 million in sales in 1987. By 1988, sales had dipped to $12 million, and Aca Joe had defaulted on a $7.5-million loan from Manufacturers Hanover Trust. By the time Aca Joe sought refuge in bankruptcy court, it also owed investors about $8 million.

“It was hard to face failure,” said Kraatz, adding that the company also lost most of its board members and was forced to lay off 125 workers.

As part of the reorganization plan, the company, with its 250 employees, is actively recruiting new, experienced managers and board members. Although Aca Joe stock is selling for only about 30 cents a share on the over-the-counter market, Kraatz said he hopes the price will soon rise to reflect the company’s improved prospects.