Denim Divas

REVIEW SUMMARY
Business. Obscene Jeans, Sarasota
Industry. Retail, fashion
Key. Startup hopes to overcome cash flow issues in order to build a successful global brand.

When Rachel Stark-Cappelli lived in Italy, she would regularly spot women in pricey designer jeans out and about for errands, even picking kids up at school.

It was pure opulence meets humdrum function.

The image resonated with Stark-Cappelli, a Staten Island, N.Y., native who moved to Italy in the early 1990s, soon after college. Stark-Cappelli relocated to Florence, where she embarked on a career in luxury fashion design and sales.

That unique use of denim never left Stark-Cappelli, both in Italy, and, more recently, back stateside. “I believe you can be sexy and elegant at the same time,” says Stark-Cappelli, 42. “There is still a need for high-end jeans.”

Stark-Cappelli is about to test her theory. She's the lead designer behind an ambitious, albeit rather risky, business venture: Obscene Jeans.

Sarasota-based Obscene Jeans aims to sell luxury worldwide amid a crushing recession. The firm, founded in late 2009, is publicly traded over-the-counter. (Symbol: OTC: OBJE, recent price: $1.25.)

Obscene Jeans has so far survived mostly on potential.

It reported a net loss of $340,713 and negative cash flow from operations of $253,833 for the nine months ended May 31, according to a July 13 Securities and Exchange Commission filing. The firm also had negative working capital of $249,785 as of May 31.

“These factors raise a substantial doubt about the company's ability to continue as a going concern,” the filing states.

The possibilities are nonetheless glittering. Stark-Cappelli's designs, now only for women, comprise jeans and shorts highlighted by shiny metallic mesh details woven into the fabrics.

The jeans are expensive to produce. Stark-Cappelli says on one design, for which she recently traveled to Italy and Turkey, the cost of the metallic materials was twice the cost of the denim.

The jeans are expensive to buy, too. The retail price will be between $140 and $250 a pair. The company doesn't want to compete with department stores, Stark-Cappelli says, or even $100 jeans sold at Banana Republic.

“No one else is doing this,” Stark-Cappelli says in a recent interview at the company's Sarasota offices. “You'll be able to wear these jeans to a cocktail party.”

Adds Stark-Cappelli, in a company statement: “Our brand is for women who want to look hot wearing jeans no one has seen before.”

Plus, on a larger basis, the global luxury denim industry could be on the verge of an explosion. Prominent fashion industry analyst Marshal Cohen, in an April report, hailed the return of the luxury woman shopper — with denim out front.

Women's jeans sales jumped 20% in the three months ended February, reports Cohen, chief industry analyst with New York-based The NPD Group. “The increase is primarily due to women buying more pairs of jeans and at a higher price point,” Cohen states in the report. “And with the influx of new styles this year, women may just need a few more pairs.”

Luxury lifestyle
But luxury items are merely the first step toward a much larger company, says Obscene Jeans President and CEO Robert Federowicz. “Jeans is a good start,” says Federowicz, “but there is no reason to stop there.”

Federowicz, in fact, wants to emulate a trendsetter like Ralph Lauren and build a global lifestyle company. Federowicz is based in Houston, where he previously worked in the power plant industry. With Obscene Jeans, he envisions a business that one day will sell hair care products, beauty supplies, and someday, personal electronics.

In that direction, on June 14 Obscene Jeans bought Beijing Beautyfresh International Trade Co., a Chinese import/export firm. It paid $25,000 for the company's assets, according to an SEC filing.

Past the products, however, the acquisition provides Obscene Jeans access to Beautyfresh's “potentially lucrative license to import luxury products and resources into the rapidly emerging Chinese luxury market,” Obscene Jeans says in a statement.

The move, and a few others like it, follows Obscene Jeans' strategy to mirror global luxury spending trends, which heavily point to China. Analysts and economists have trumpeted the emergence of luxury in China for several years, theories that recently intensified.

Aaron Fischer, an analyst with Hong Kong-based CLSA Asia-Pacific Markets, a brokerage and investment firm, is one of many in that chorus. “We are very positive on the luxury goods sector,” writes Fischer in a June report, “which we believe is the fastest-growing consumer segment and a pure play on rising income and consumption in China.”

Still, while total lifestyle is the ultimate goal at Obscene Jeans, Federowicz and Stark-Cappelli realize the company's first major step toward success, if not sheer survival, will come in mid-August.

That's when it will debut the initial Obscene Jeans line for women at the annual WWDMAGIC fashion trade show in Las Vegas. It's a Super Bowl-like event, filled with industry distributors, buyers and shoppers.

“We can't wait to get out there,” says Federowicz. “I'm super-happy, but I'm also a little scared.”

Big splash
While Federowicz' fears refer to feedback on the Obscene Jeans line, there could also be some lingering anxiety on the business itself.

To be sure, Federowicz oozes optimism.

“This (fashion show) is going to be the perfect introduction for Obscene Jeans to the international fashion industry,” Federowicz says in a July 14 statement that touts the company's approach to WWDMAGIC. “Our new collection is an amazing meld of luxurious fabrics and sensual washes with bold metal accents. It's designed to turn heads, and we can't wait to cause a stir.”

But even with high confidence and the upbeat report from The NPD Group's Cohen, Obscene Jeans won't likely have a zippy path to success.

Christopher Ramey, a one-time retail industry executive and Coral Gables-based marketing consultant, says the obstacles Obscene Jeans faces could be both internal and external. “They will need to get a lot of buzz,” says Ramey, who runs the Luxury Marketing Council Florida. “And they will need to get distribution right.”

Moreover, fast-growing markets such as China are tough, says Ramey, because Asian buyers are “extraordinarily brand conscious.”

Another hurdle: Denim might be in growth mode, but the luxury denim market remains a sliver of the industry. Some industry estimates peg the amount of U.S. shoppers who will buy jeans for more than $50 a pair at around 1% of the total pool of shoppers. “It's rarefied air,” Ramey says.

Rare, but not impossible.

Obscene Jeans executives, for instance, can take comfort in the success of companies like Vernon, Calif.-based True Religion Apparel. Founded in 2002 by then husband-wife duo Jeffrey Lubell and Kym Gold, True Religion reported $363.7 million in 2010 revenues. It's one of a few luxury denim companies to find a niche in the recession.

'Huge boom'
Company executives concede that for Obscene Jeans to achieve that kind of success, it not only needs to hit it big in Las Vegas.

It also needs cash.

Specifically, Obscene Jeans, in its July 13 SEC filing, states it needs $500,000 to cover the next 18 months. The first phase, $150,000, is for design, the company states. The second phase, $350,000, would go partially toward production, sales and marketing.

Federowicz, who was born in Poland, has spent most of his recent time courting investors. He says the luxury industry data combined with the design of the jeans have impressed potential investors.

But he's not hiding from the gamble, either. “We are not sugar coating this,” Federowicz says. “Investors know the risks.”

Stark-Cappelli, meanwhile, has risked her design future on Obscene Jeans. The designer has been there before, to a lesser extent, when she launched a luxury jeans company in Italy in the late 1990s. The company eventually grew to 14 sales agents and six employees. “It was a huge boom in jeans,” says Stark-Cappelli. “They were exploding in the European market.”

Stark-Cappelli moved to Sarasota with her family in 2005. She worked in sales of promotional products for a few years. Then she met Federowicz, and the pair found several common interests, especially when it came to denim done right.

“I truly love and believe in elegant jeans,” Stark-Cappelli says. “Now I finally get to bring that design to fruition.”