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How Nasty Gal Went from an $85 Million Company to Bankruptcy

24/02/2017 10:59am

Dow Jones News


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By Sarah Chaney 

The rapid rise and fall of Nasty Gal Inc., an online retailer once popular with millennial shoppers and venture capitalists, is culminating in a bankruptcy sale to a rival.

In less than a decade, Nasty Gal founder Sophia Amoruso, 32 years old, transformed an eBay vintage store into a company that generated $85 million in revenue for the 2014 fiscal year.

But the Los Angeles company's swift growth led to stumbles. Leadership turnover and poor communication hurt its bottom line, according to interviews with 10 former employees. Some described the company culture as becoming "toxic," referring to turbulence in recent years including several rounds of layoffs.

The turmoil culminated in a November bankruptcy filing, with Nasty Gal preparing to sell its brand name and other intellectual property for $20 million to a rival fashion site, the U.K.'s Boohoo.com. Nasty Gal's saga serves as a cautionary tale for startups and investors who, in their quest for quick growth, don't always spend their money wisely, retail analysts and former employees say.

A Nasty Gal spokesman declined to comment for this article. Early in the bankruptcy case, Nasty Gal lawyer Scott Gautier said the company "is an incredibly valuable brand and will only be stronger through the chapter 11 process."

Boohoo.com, which declined to comment for this article, has said the transaction "has the potential to accelerate the group's international growth, particularly in the U.S."

Named after the album by funk musician Betty Davis, Nasty Gal began in 2006 as the then-22-year-old Ms. Amoruso scoured vintage shops for stylish apparel and accessories that she resold on eBay. It was a step up from her teenage life "of dumpster diving and petty thievery," Ms. Amoruso wrote in "#Girlboss," her memoir and career how-to that is the inspiration for a Netflix series premiering this year.

Ms. Amoruso promoted her business via social media, where demand quickly exceeded her supply of inventory, she wrote in "#Girlboss." She bought the site nastygalvintage.com and began approaching labels.

In 2012, the startup began selling clothes under its own name and also leased a Kentucky distribution center. Venture capitalists came knocking, with Index Ventures providing at least $40 million in funding, according to an Index press release. Representatives of Index didn't respond to requests for comment.

The company gained traction on social media with its dichotomous aesthetic: high and low, edgy and glossy. "Nasty Gal is like Urban Outfitters on crack," said fashion blogger Justina Sharp.

As it grew, former employees say, Nasty Gal built out its management team and hired junior talent from retail outlets such as Urban Outfitters Inc. But their traditional retail backgrounds clashed with the startup mentality, these people said, and certain choices -- namely a new Los Angeles office and the Kentucky warehouse -- were seen by some employees to be too big and expensive for what the company could afford.

Nasty Gal opened a brick-and-mortar store in Los Angeles in 2014 and one in Santa Monica in 2015. Meanwhile, bankruptcy-court filings say Nasty Gal's revenue fell in 2015 as it failed to adjust its product mix to its growing customer base. A move to raise prices "definitely became a problem," said independent retail analyst Kelly Tackett, pointing to giant fast-fashion chains' ability to churn out the latest styles at lower prices.

Within the company, turnover and layoffs across ranks weakened morale, former employees said. In 2015, Ms. Amoruso ceded her role as chief executive to former Lululemon executive vice president Sheree Waterson, who had joined Nasty Gal in 2014 as president and chief product officer. Court papers show Ms. Amoruso was a director and had a 55% stake, including common and preferred stock, in the company at the time of its bankruptcy filing.

Nasty Gal declined to make Ms. Amoruso and Ms. Waterson available for comment, and Ms. Amoruso didn't respond to requests for comment.

Shoptalk retail analyst Sucharita Mulpuru said Ms. Amoruso should have handed over the reins sooner.

"You can be a fantastic designer and marketer and create a brand that resonates with people, but that doesn't mean you can successfully manage the business part of your company," she said.

More departures followed. Bankruptcy filings say Chief Operating Officer Michael Kramer and Chief Financial Officer Robert Ross were terminated within a two-week span last year.

Mr. Ross said in an interview he had philosophical differences with the CEO and the board. He was retained to negotiate a sale of the company, but the sale fell through and his employment contract expired, Mr. Ross said. Mr. Kramer couldn't be reached.

Between 2015 and 2016, bankruptcy-court filings say, the cash-strapped company raised an additional $24 million in equity and debt financing from venture-focused Stamos Capital Partners LP and Hercules Technology Growth Capital Inc. Representatives of the firms didn't respond to requests for comment.

While the funding helped the business stay afloat, bankruptcy filings say Nasty Gal still struggled to purchase new inventory, as well as pay rent and other operating expenses. It also pursued a sale.

Efforts to sell the company were hindered in part by strained vendor relationships, court documents say. Lacey Micallef said her Los Angeles-based women's apparel label Big Bud Press was set back "tremendously" by several months' of unpaid bills from Nasty Gal.

Nasty Gal entered chapter 11 protection on Nov. 9, one of a number of retailers in search of breathing room from broad industry distress. The company professed a desire to emerge from bankruptcy "as a profitable enterprise poised for growth."

Within weeks, however, Nasty Gal struck a deal to sell its brand name to Boohoo.com, whose offer won bankruptcy-court approval on Feb. 8. In connection with the sale, Nasty Gal is laying off employees and closing its brick-and-mortar stores.

 

(END) Dow Jones Newswires

February 24, 2017 05:44 ET (10:44 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.

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