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If the Shoe Fits, Wear It: Candie’s in Surprise Deal To Buy Badgley Mischka

Mark Badgley and James Mischka, the purveyors of expensive evening gowns, have found a business partner right under their feet in Candie’s Inc.

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NEW YORK — Mark Badgley and James Mischka, the purveyors of expensive evening gowns, have found a business partner in an unlikely place: moderate footwear and jeans company Candie’s Inc.

The designers signed a deal on Friday afternoon with Candie’s, best known for its youth-oriented footwear, that will effectively rescue one of the most prominent high-end eveningwear businesses in U.S. specialty stores. After financial difficulties sidelined the Badgley Mischka label for the spring 2005 season, the designers vowed they would return with a collection for fall retailing next year.

Candie’s is expected to announce today that it has acquired B.E.M. Enterprises Ltd., the holding company for the Badgley Mischka business, from its parent company Escada U.S.A., which has owned the brand since 1992. Escada said in October 2003 that it had put the 16-year-old label, which had yet to become profitable, on the block in the wake of its own restructuring. While the exact terms of the sale to Candie’s were not disclosed, the final purchase price will be determined by how Candie’s stock performs in the next six months.

Badgley Mischka’s problems, which forced the company to seek out new backers this summer, have been endemic in the eveningwear industry. Those designers are typically dealing with a higher price point, as well as higher costs of production and materials, making their profit margins minimal at best.

In Badgley Mischka’s case, the designers had yet to establish a significant stable of licensed products that typically provide the royalties needed to support a runway collection. Considering their editorial appeal and celebrity following, the designers feel they are on the verge of reaching that threshold, a point on which Candie’s would agree.

“We pursued Badgley Mischka because we feel this is an amazing brand, and the more we looked at it, we just saw enormous potential to expand the product,” said Neil Cole, chairman and chief executive officer of Candie’s, in an exclusive interview, along with the designers, on Friday.

Candie’s is an unexpected player to enter the luxury apparel market, but the acquisition of the Badgley Mischka trademarks is the first step in its strategy to build a more diversified portfolio, said Cole, whose brother Kenneth Cole famously broke from the family business to found his signature company in 1982. Candie’s has also changed its business model in recent years by eliminating its own production and licensing the operations of its brands, Candie’s and Bongo, which together generate about $200 million in sales. This year, Candie’s footwear was licensed to Kenneth Cole Productions Inc. and Bongo to Steve Madden Ltd., while TKO Apparel Inc. is in the process of taking over the Bongo jeans business as a licensee.
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The company is planning to take a similar approach with Badgley Mischka. Rather than producing the collection, as Escada did, Cole hopes to identify a strategic partner that will take on the production of the collection in a deal much like what Phillips-Van Heusen has done with the Calvin Klein brand since it was acquired last year. Candie’s will instead focus on the licensing and marketing side of Badgley Mischka, building an image and stable of products that fall in line with the image set by the runway collection.

Creating memorable images is certainly an area where Candie’s has some experience, given its latest campaign with Ashlee Simpson or the notorious advertisements from 1997 that showed Jenny McCarthy, the MTV and Playboy Channel poster child for potty humor, sitting on a toilet with her panties pulled down around her ankles.

The transformation has been relatively successful, as the company’s stock has more than doubled its value of the last year with a 111.4 percent increase. Shares of the firm picked up 2 cents, or 0.5 percent, Friday to close at $4.44 in Nasdaq trading. Its revenues for the six months ending July 31, reflecting the shift to licensing royalties, fell 43 percent to $47.9 million, while earnings were $551,000 as compared with a loss of $3.1 million a year earlier.

The acquisition of Badgley Mischka, which will be paid with shares of Candie’s common stock, will bring Candie’s into a different market segment. Cole stressed that any future products under the label will respect its designer heritage, but both he and the designers feel there will be a logical transition of the Badgley Mischka brand from the more designer-oriented environs of Escada to Candie’s less rarefied world.

Candie’s had 18 licensees for Candie’s and Bongo prior to the deal with Badgley Mischka, which now brings its total to 20. The immediate focus will be on finding a production partner, as well as targeting additional licensing opportunities beyond Badgley Mischka’s two existing deals — one with Pronovias USA for bridal gowns, and another for fur coats with BC International.

“Yes, we’ve been marketing to teenagers for the last 25 years, but we have been looking for a way to diversify our business,” Cole said. “We see great potential in Badgley Mischka in accessories, certainly footwear or handbags are a no-brainer, but we’re going to be exploring natural brand extensions.”
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Badgley and Mischka, who will be compensated with a revenue participation in the business going forward, said they were interested in Candie’s for its marketing and licensing expertise.

“The potential of our company has never been realized because we were never focused on that,” Mischka said.

“Fashion each season comes like a bullet,” added Badgley. “We never had the time, but this is really right for us.”

The designers and Escada executives entertained a number of potential offers over the past year, but a deal did not appear likely unless the company was restructured as a licensing business. In July, when Escada announced it would not provide the funding for a spring collection, the designers began to shut down their operations, including their showroom at 525 Seventh Avenue here, and letting about 40 employees go. They will begin to restaff this week and are looking for new real estate in the West Chelsea neighborhood, they said.

“We were able to sit back and think about what we really want to do,” Mischka said. “We want to build a business.”

The designers plan to put together a fall collection, but it is not clear whether they will be able to stage a formal show during the next New York Fashion Week in February. That will depend on whether they can find a partner that can make a viable business out of the high-end collection, which had sales of about $40 million at retail before it was shut down. Cole projected that number could double within a year.

“We are talking to people who are very interested and we are going to find a strategic partner,” Cole said. “We will find a way to do this because the collection is very important to our marketing approach. Mark and James have this amazing talent, and now is the time to expand the brand and bring it to new heights. One of the advantages we have is Mark and James themselves.”

The designers got together with Candie’s through UCC Capital Corp., which has been involved in an increasing number of intriguing designer deals. UCC orchestrated the sale of Bill Blass Ltd. through the bond market in 1999 and also provided asset-backed financing to Candie’s in 2002. Last month, UCC facilitated the introduction of Oscar de la Renta Ltd. to the Connecticut-based Webster Bank to expand the company’s credit facility with more aggressive terms than those offered by its previous lender, reportedly Fleet Bank. Robert D’Loren, president and ceo of UCC Capital Corp., is also a member of Candie’s board.
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