Owners of Judy’s Consider Selling Clothing Chain for $31 Million
Judy’s, the Van Nuys-based clothing store chain, is holding discussions about selling the company to an unidentified, out-of-state clothing concern in a $31-million deal.
As part of the agreement announced Monday, the Israel family, which controls 78% of Judy’s stock, will not sell its shares to another company for 110 days. The unidentified party has tentatively agreed to pay at least $6.71 per share of Judy’s stock, according to Marcia Israel, Judy’s founder and chief executive.
Judy’s stock closed Monday at $5 per share, which was down 25 cents.
According to the agreement, if the would-be buyer doesn’t go ahead with the deal or offers less than $6.71 a share, it will have to pay Judy’s up to $150,000. If the Israels refuse a bid of at least $6.71 per share, they would have to pay the proposed buyer’s transaction costs up to $600,000.
Israel said negotiations with the unidentified company began early in June. Israel, 68, said she was willing to sell the company because she didn’t believe that she had sufficiently skilled managers in place who would be able to succeed her. And having to groom new managers would take some time. “It would be a long haul, and none of us is immortal,” Israel said. Her husband, Lawrence Israel, Judy’s chairman of the board, is 72.
The Israels own their 78% of Judy’s stock along with their two daughters. It would be worth about $24 million at the $6.71 a share buyout price.
If the takeover goes through, Marcia Israel will step down as Judy’s chief executive officer and will be paid $1 million over five years as part of a one-year consulting and non-compete agreement.
Terms of the tentative agreement call for the buyer to acquire all of Judy’s outstanding stock but to continue to operate the chain under its current name.
The timing of the possible takeover comes as Judy’s has been struggling to boost its profits after several poor years. Judy’s was founded 40 years ago by Israel, who at the time was a model. She said she was inspired to open her own store because she couldn’t find anything she liked to wear. For many years, she seemed to have a gift for knowing what young women wanted to wear.
As recently as the fiscal year that ended in January, 1986, Judy’s turned a $1.2-million profit on sales of $56.7 million. But since then, Israel seems to have lost her touch. Judy’s profits slid to $426,000 in 1987 and to a mere $7,000 in 1988. For its latest fiscal year, which ended in January, the company would have lost $248,000 were it not for a tax adjustment. Meanwhile, sales essentially have been flat for four years. In the quarter that ended in April, Judy’s lost $195,000.
“It was a terrible, terrible letdown to go 40 years with terrific profits and then have these two years,” Israel said.
For whoever winds up with control of Judy’s, the major problem will be how to cope with the company’s chief market, a notoriously fickle group of consumers called “juniors.” Today, the Judy’s chain consists of 70 women’s clothing stores and 34 men’s clothing stores in five Western states, chiefly California. Both the men’s and women’s stores sell sportswear and accessories.
Judy’s is best known for selling moderately priced but trendy clothes that attract not only teen-agers but women in their 30s and even 40s who can fit into the slim-cut, stylish clothes.
Plenty of Competition
Joel Knapp, president of Judy Knapp, a Los Angeles clothing manufacturer, said Judy’s has plenty of competition, including other retailers such as Contempo, Cherokee and the billion-dollar chain The Limited.
Another local fashion industry observer said: “Judy’s is getting squeezed by the titans who really have their act together. And they’re getting squeezed by the up-and-comers who are doing innovative marketing. A store like Judy’s that has been around awhile is going to lose some market.”
Marcia Israel blames the company’s recent slide on her decision to delegate clothes-buying authority a few years ago. She said she took that step because of repeated criticism of her management style. “The industry said it was a one-man show,” Israel said. “The retailers, manufacturers kept saying I didn’t know how to delegate.
“It turns out that I was right; they were wrong,” she said.
Buying Problems
Israel said delegating too much authority meant that Judy’s suffered through several years of chronic overbuying and underbuying, leading to markdowns and low sales.
Israel also believes that her stores lost the sharp definition it takes to appeal to her customers. “When the customer becomes confused about what she’s going to find at a particular store, you lose ground,” she said. “The customer walks away.”
About six months ago, Israel looked at the company’s dismal earnings and decided that she’d had enough. Since then, she has been directing inventory and merchandising and trying to forge an unambiguous fashion image for Judy’s. She has been trying to cut personnel costs, she said, reclassifying some employees to lower-paying jobs and laying off 10 truck drivers.
But in many ways, Israel has continued to run the company like a private one. In Judy’s latest proxy statement, for instance, Israel said she planned to cut her annual pay from $150,000 to $58,000. But she recently changed her mind, saying there’s no need to take a pay cut because she thinks that the company has shown signs of coming back. She points to a 27% jump in same-store sales from mid-May to mid-June compared to the same period a year ago.
Indeed, since she started the company, Judy’s has been run the way Israel wants to run it. The roots of Judy’s reach to the years immediately after World War II, when Los Angeles’ defense-based economy, still gearing down from wartime production demands, was doing a poor job of meeting the needs of fashionable women, Israel said. In 1946, when she couldn’t find any “young” clothing to wear, she borrowed $1,000 from her mother and opened a 7-foot by 10-foot hole-in-the-wall store on Whittier Boulevard in East Los Angeles. “It was the first young boutique of our generation,” Israel said.
She picked the name Judy’s because it was short enough to fit on the skinny storefront. She later named one of her daughters Judy.
By the 1960s, Judy’s stores were seen as trend-setters. According to Knapp, “They were unique. They were the first to capitalize on the emergence of the junior customer.” And some teen-agers were only too glad to take part in the trend.
Connie DaVersa, an adult free-lance garment buyer in Los Angeles today but an impulse-buying California teen-ager in the late 1960s, remembered her own weakness for Judy’s stores. “It was the place to shop. They had great displays of what kind of things would go together to encourage you to buy a whole outfit. They would put different colors together that you wouldn’t have thought about combining. If you saw it at Judy’s, you figured, ooh, it must be cool.”
In 1969, the Israels sold their 17-store chain to Beck Industries for about $8 million. Within two years, though, Beck had filed for bankruptcy protection, and in 1971, the Israels bought the company back for what Marcia Israel has said was significantly less than the selling price. A year later, the couple took the company public.
The chain expanded rapidly during the 1970s, largely by plowing profits back into growth. It reached its peak profits in 1984, when Judy’s earned $1.5 million on sales of $46.7 million. Soon after, the slide began.
Despite the company’s recent problems, the Israels have continued to do well. Besides their combined $300,000 salaries, the Israels took home about $182,000 last year in dividends. Moreover, they own a separate company that Judy’s paid $288,000 last year to provide security systems at the clothing stores.
JUDY’S INC. AT A GLANCE
Judy’s operates a chain of 70 women’s and 34 men’s apparel stores for teenagers and young adults in California and four other western states. The Van Nuys-based company, founded with one store in 1946, has about 1,000 employees.
