(Filed Under wholesale Lingerie News). Peekay Boutiques, Inc., the adult chain that became a public company this February, expects to expand from its current fleet of 47 stores “at a rate of 8-15 stores per year, resulting in 114 stores by the end of 2019.” That information, including the fact that its sales rose to $39.449 million in fiscal 2013 (and $29.367 million for the first nine months of 2014) and much more can be gleaned from an examination of various documents recently filed with the SEC.
In 2013 the company reported a full year loss of $2.577 million, and for the first nine months of 2014, a loss of $2.704 million (compared with a loss of $1.932 million on similar sales of $29.138 million in the first nine months of 2013). For 2012 the company reported a loss of $910,000.
In its going public announcement in mid-February the company explained, “Christal’s Acquisition, a subsidiary of Peekay, completed its reverse merger with Peekay on December 31, 2014.” Shares in Peekay are held by a few investors, but are eventually expected to be quoted on the OTC Bulletin Board under the symbol PKAY.
Currently about 20 of the stores are in Washington (where its executive offices are located in Auburn), 14 in California and five in Texas with the rest in Tennessee, Oregon and Iowa. Peekay operates under a number of store names including: Lovers, A Touch of Romance, ConRev and Christal’s. The varied retail entities were consolidated into a single unit over the last few years, with the assembled chain taking on the Peekay corporate name earlier this year.
Lingerie makes up “approximately 17%” of sales, “including brands such as Dreamgirl, Coquette, Escante and Rene Rofe” according to the company. “54% of our sales” are in the area of “personal items,” a list which includes “massagers, vibrators,” under brand names “such as Jimmy Jane, Pipedream, We Vibe.” 29% of sales are “gift items” which the company said ”include personal lubricants, apothecary, candles, condoms and sensitizers and desensitizers.”
In discussing its plans to expand, Peekay noted in a 2014 filing that “in fiscal 2014, we will have opened 6 new stores with a seventh store under construction,” adding that during that year “the average investment required to open a typical new store was approximately $250,000. Our continued expansion places increased demands on our financial, managerial, operational, supply-chain and administrative resources.”
Peekay admits “Our continued and future growth largely depends on our ability to implement our long-range strategic and financial plan and successfully open and operate new stores on a profitable basis.” But in assessing the various risk factors it faces it concedes, “We have a significant amount of indebtedness. As of September 30, 2014, our total debt was approximately $52 million.” Much of the debt was incurred in purchases of stores as it assembled the chain.
Peekay explains, “Subject to the limits contained in our existing debt instruments, we may be able to incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. Due to the capital intensive nature of our business and our growth strategy, we expect that we will incur additional indebtedness in the future. If we do so, the risks related to our high level of debt could intensify. Specifically, our high level of debt could adversely affect our financial condition” in a variety of ways.
Peekay noted that $38 million of its debt “is under a credit facility that has a term expiring on December 27, 2015. Substantially all of our assets are pledged as collateral for outstanding borrowings under this credit facility. Outstanding borrowings under this facility and other unsecured notes bear interest at rates ranging from 9 to 15%.” The company added, “We needed to obtain waivers from our secured lenders of our leverage ratio and minimum liquidity covenants and will likely require additional waivers of covenants in the future. If our secured lenders do not provide such waivers and if we are unable to refinance our secured debt on terms favorable to us, we could default on such debt, which would have potentially material adverse consequences.”
“During the nine months ended September 30, 2014, we obtained two covenant waivers through amendments to our financing agreements with our secured lenders, dated March 31, 2014 and September 30, 2014. We expect that we will need covenant waivers in future periods, and, on December 16, 2014, we received waivers of the leverage and minimum cash covenants for the quarters ended December 31, 2014 and March 31, 2015. There can be no assurance that we will be able to obtain additional waivers.“
In discussing its operations, Peekay said it has 5,000 SKUs and buys from about 70 vendors. Among its top 20 vendors, its largest supplier accounts for 6.5% of its purchases, the smallest, 1.3% of purchases.
In discussing the size of its overall market, Peekay noted that “While determining the total annual sales of sexual wellness products in the U.S. is difficult, in 2010 INSEAD valued the total market at $884.65 million. Recent surveys substantiate the strong demand among U.S. consumers for sexual wellness products and predict significant growth into the future. (INSEAD is business school located in France, Singapore and Abu Dhabi).
Looking ahead, Peekay will consider additional acquisitions as part of its expansion efforts. “Our market is primarily made up of small, regional players and represents a significant opportunity for expansion of store footprint through both greenfield store development in new markets and targeted acquisitions. Many regional and e commerce companies exist both domestically and internationally. Acquisitions would allow us to quickly expand our geographic footprint into new and adjacent markets.”
Peekay said it seeks “to locate stores primarily in or near centers with major national brands and regional brands such as Target, Walgreens, TJ Maxx, Sally Beauty Supply, Starbucks and others,” and added that “We balance our store expansion between new and existing marketplaces. In our existing marketplaces, we add stores as necessary to provide additional coverage. In new marketplaces, we generally seek to expand in geographically contiguous areas to leverage our experience. We believe that our knowledge of local marketplaces is an important part of our success.”
In analyzing its own place in the market, Peekay stated, “Our major competitors for our lingerie, women’s wellness and sexual health products include Adam & Eve, Ann Summers, Pure Romance, Pleasure Chest, Kiss & Tell and Romantix. For our lingerie products, we also compete with traditional department stores such as Macy’s and Nordstrom and specialty stores such as Victoria Secret and Frederick’s of Hollywood. The online businesses of the aforementioned retailers as well as pure play e-commerce business such as Amazon are also competition. Our competitive advantages are the quality and assortment of merchandise and services, our value proposition, the quality of our customers’ shopping experience brought about as the result of our knowledgeable and welcoming sales personnel and the convenience of our stores and website as a one-stop destination for lingerie, women’s wellness and sexual health products.”
The adult retailer revealed that “As part of our change in merchandising strategy to a “wellness” focus, we have discontinued our visual category, which constitutes video sales (a lower margin product not targeted at our key demographic).”
Lisa Berman is CEO and president of Peekay. Prior to starting at the retailer, she was CEO at Jimmyjane, and The Picture People, formerly a subsidiary of Hallmark Cards. In addition, earlier in her career she was an executive at Limited Stores, Pottery Barn, Guess, and Victoria’s Secret. Bob Patterson became the COO on December 31, 2014. Prior to joining Christals Acquisition in October 2012, “Patterson spent four years as an operating partner for private equity with Blacksteet Capital, Parallel Investment Partners and MARS.”
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