Bluefly, Inc. History

Address:
42 West 39th Street
New York, New York 10018
U.S.A.

Telephone: (212) 944-8000
Fax: (212) 354-3400

Website:
Public Company
Incorporated: 1991 as Pivot Corporation
Employees: 83
Sales: $30.6 million (2002)
Stock Exchanges: NASDAQ
Ticker Symbol: BFLY
NAIC: 454111 Electronic Shopping

Company Perspectives:

Bluefly strives to be the store of first resort for fashion by offering the most compelling combination of selection, value, service, and convenience.

Key Dates:

1991:
Pivot Corporation is founded by Ken Seiff to produce golf-inspired apparel.
1994:
The company changes its name to Pivot Rules, Inc.
1997:
The company makes an initial public offering.
1998:
Golf apparel is discontinued in favor of Internet business.
1998:
The company changes its named to Bluefly, Inc.
1999:
George Soros is the first to invest in the company. rivals, Cybershop and Outletmall, both of which went out of business. Despite the departure of competition, as well as a growing customer base and increasing sales, Bluefly remained in a challenging financial position, so that early in 2000 the company indicated it was shopping for a financial investor. However, with venture capital drying up for ecommerce, in mid-April the company shifted its focus to a search for a "strategic investor," although Seiff denied that the company was for sale. Investors, in the meantime, were pressing Bluefly to prove it could be a profitable business. Although Seiff maintained that the company could simply "turn the switch and move to profitability" if it no longer plowed revenues into marketing and infrastructure needed to grow the business, Wall Street remained unconvinced. The price of Bluefly stock, which traded at $20 at its peak in 1998, dipped below $2 per share in August, at which point the press reported that management was beginning to seriously consider selling the company. In spite of speculation that Bluefly was running out of money, Seiff maintained that the company had enough cash on hand to last through the year. Announcements of an expanded relationship with America Online's shopping site and new funding from Soros helped to stop the company's decline in the equity markets. Bluefly stock rebounded to the $3.50 range. In October 2000, Soros reaffirmed his faith in Bluefly, or at least moved to shore up his position in the struggling business, by arranging to have Soros Private Equity Partners acquire a controlling interest in a deal that could bring $25 million in financing to Bluefly. For the year, net sales improved to $17.5 million, but the company nonetheless lost another $21.1 million and the price of its stock continued to decrease, falling in December 2000 to below $1.

Bluefly started off 2001 facing negative publicity, as Barron's Online ranked the firm as number two on its "Burn Victims," a list of companies with the highest cash burn rate. Seiff took public umbrage at the designation, but there was no doubt that at the very least Bluefly faced a challenge in its effort to turn a profit and achieve stability. Again, Soros came to the company's aid, committing another $10 million through his funds. However, with the company's future increasingly tied to his backing, Soros began to exercise more of a direct hand in the running of the business. In June 2001, Bluefly fired one-third of its staff, 32 jobs, and cut its marketing budget, part of a plan to reach profitability by the end of 2002. The company did manage to significantly reduce its year-end losses, recording a net loss of $6.5 million on sales of $30.6 million.

In January 2003, Soros invested another $1 million in Bluefly through companies he controlled. New management was also installed in 2003, when the former president and CEO of Spiegel Catalog, Inc., Melissa Payner-Gregor, was brought in to fill the newly created position of president. She reported directly to Seiff and was responsible for merchandising, marketing, and e-commerce groups. Payner-Gregor had 23 years of retail experience. While at Spiegel, she oversaw Spiegel's catalog, Internet, and outlet stores and was successful in cutting costs while growing Spiegel's online business. In October 2003, Soros pledged another $2 million, his total investment in Bluefly now totaling $55 million.

Company History:

Bluefly, Inc. operates an Internet outlet store (bluefly.com) for designer apparel and upscale home accessories that the company claims to sell at prices as much as 30 to 75 percent cheaper than retail. The New York City-based company offers more than 350 brands of designer apparel, including such prominent labels as Prada, Ralph Lauren Collection, Tod's, Diesel, Michael Kors, Dolce & Gabbana, Diane Von Furstenberg, Gucci, and Versace. In 2002, Bluefly sold close to 70,000 different types of items. Although the site sells menswear, Bluefly caters primarily to women customers around 30 years of age. Houseware offerings include such merchandise as bedding, bath, dinnerware, drinkware, flatware and table linens, picture frames, and pillows and throws. Bluefly is 90 percent-owned by money manager George Soros.

1991 Origins as a Golf Apparel Retailer

Bluefly was incorporated in 1991 as Pivot Corporation by E. Kenneth (Ken) Seiff. He grew up in the affluent community of Scarsdale, located in Westchester County, north of New York City. After graduating from the Wharton School of Business, he took a job on Wall Street with Lorne Weil, Inc., a strategic planning and corporate development consulting firm, where he worked from 1986 to 1988. He then struck out on his own for a spell, creating EKS Capital Corporation to serve as a leveraged buyout firm. In 1989, he returned to the corporate fold, taking a job with Founders Equity, another New York-based buyout specialist. It was while he was looking into a acquisition candidates for Founders that Seiff, who had never played golf, became familiar with golf apparel. Many of his friends were golfers, and he soon became aware that they were not enamored with the traditional garb featuring garish colors and decidedly un-hip plaids. Even older golfers were known to change at the golf course rather than wear such clothing in public. However, younger golfers, including Seiff's friends, could not afford to maintain a separate golf wardrobe. From these seeds, Seiff conceived of a line of golf-inspired sportswear, clothing that, in his words, was suitable for "the front nine and the backyard." Moreover, rather than sell the apparel in golf pro shops, he wanted his line to be available where his target customer shopped--department specialty stores. Thus, in April 1991, he quit Founders and co-founded Pivot Corporation, serving as chairman, treasurer, and chief executive officer.

Seiff's co-founder was designer Courtney Taylor. They were the only two employees of the company in the early days and were responsible for everything from design to selling. According to Seiff, they worked every day of the week from early in the morning until midnight or later. In the first year, he estimated he took off no more than three or four weekend days. As the clothing line became established, Seiff hired a longtime friend, James Hilford, to help out. Hilford had an advertising background but quit his job at BBD Needham to take off a summer to play golf. Because Pivot had a trade show coming up and it was too early in the year to play golf, Hilford agreed to work the show, after which he began to fill a number of other functions in the office, including typing and even some cleaning. He never did take his golfing holiday, staying on at Pivot to head sales and ultimately to take over as president so that Seiff could focus on the big picture for the company. Hilford's brother, Andrew, who held a Ph.D. in cognitive psychology, was enlisted to write the company's ad copy, which was then placed by CMG Advertising. Andrew Hilford was credited with creating the company's advertising tag line: "Pivot Rules. Clothes You Can Play a Round In."

In 1994, Pivot Corporation became Pivot Rules, Inc., and in December of that year the company's original unnamed investors sold out to Seiff and his management team. At this stage, Pivot managed to place its clothing line in such department stores as Bloomingdales and Macy's despite Seiff's lack of retail experience. Seiff's goal was to build Pivot into a lifestyle brand along the lines of Nautica, Polo, and Tommy Hilfiger. As he explained to the Daily News Record in 1995, "Nautica doesn't require you to sail to wear their clothes and Polo doesn't require you play polo to wear their clothing, just like we don't require that you play golf. If we can properly capture the lifestyle and convey that to the consumer, which is something Tommy does extremely well with his young American approach, I think there's room for another brand. These things don't happen overnight, much to our frustration, but I certainly think it's achievable in the long run." In addition to the company's original golf-inspire menswear, Pivot added women's clothing, tested a boys' line, and looked to include a lower-priced tier of men's golfing clothes. The company also delved into licensing, including as a neckwear deal with Robert Stewart.

Company Goes Public in 1997

Pivot went public in May 1997, raising $7.5 million, $3 million of which was earmarked for an advertising campaign to help the clothing line move from upper-moderate to moderate prices. Filings associated with the offering indicated that revenues grew from $2.2 million in 1992 to $8.6 million in 1996, when the company recorded a net profit of $135,000. Nevertheless, despite an increase in sales and the rising popularly of golf-lifestyle apparel, Pivot faced serious challenges from both designer labels and retailer's private brands. Pivot's answer was to shift its focus to the moderate-priced segment, selling to higher-volume department stores, sporting goods stores, catalogs, and even discounters--the opposite approach to what had made Pivot initially successful. In 1996, the company also decided to eliminate its women's sportswear collection, which accounted for less than 13 percent of total sales, although it continued to sell some women's clothing on a contractual basis.

In September 1997, Pivot moved its corporate headquarters and showroom to a larger space in midtown Manhattan. "It's an exciting time in our history," Seiff declared. "The move is a reflection of the company's continued growth and future goals." Within a matter of months, however, Seiff decided to exit the golf apparel business entirely and dramatically shift the focus of his company. Supposedly frustrated after spending a day of outlet shopping, during which he was forced to sort through disorganized bins only to find out-of-date designer clothing, Seiff had a moment of inspiration: why not use the power of the Internet to create a virtual outlet store that could carry up-to-date fashions from a wide range of labels? In May 1998, Pivot announced its intention to form a new division to market brand-name discounted apparel on the Web. Clothing companies, to this point, had been reluctant to embrace the Internet, but when online sales enjoyed a significant bump during the 1997 holiday season, Seiff was not alone in targeting the Internet for future growth. Establishing an online presence was of such great importance that Seiff and his staff worked virtually around the clock, so that by September 1998 Pivot launched its ecommerce site, bluefly.com. The origin of the name, according to company literature, was pinned to the image of a fly--a creature that was nimble and quick to change directions. "Blue" was added because it conveyed a friendly personality. The creation of Bluefly could not have come at a more opportune time for Seiff. The change to the moderately-priced market for its apparel failed to work, and the company was unable to reestablish its department store connections. In 1997, the company lost $381,000. Thus, in late June 1998, Pivot elected to discontinue is golf sportswear line. The company sold the Pivot Rules brand and trademarks, and in October 1998 changed its name to Bluefly, Inc.

When the Bluefly web site opened for business on September 8, 1998, it offered items from 40 designers, including apparel from such well-known brands as Ralph Lauren, Tommy Hilfiger, J. Crew, and Donna Karan. In that first month, the company shipped a mere 96 orders, but just three months later, in December, Bluefly shipped more than 2,700 orders. Traffic to the site also increased dramatically, growing from 28,000 unique visitors to some 660,000. Registered users also grew from 1,572 at the end of September to 26,048 at the end of 1998. The company also established a key alliance with the Yahoo shopping site, creating a co-branded store that resulted in a 40 percent surge in the price of Bluefly stock. In addition, Bluefly also established a strategic marketing deal with another prominent Internet portal, Lycos. For the year, Bluefly lost $3.7 million, due in large part to costs involved in launching the site.

Losses in the Late 1990s

Business would grow in 1999, but spending, mostly for marketing, kept pace, contributing to further losses. For the time being, at least, the company had little difficulty in acquiring additional funds. In February 1999, Bluefly raised $10.2 million through the exercise of warrants and underwriter options connected to the Pivot Rules' initial public offering of May 1997. Another $10 million came from Soros Equity Partners, led by billionaire financier George Soros, who received a 19.5 percent equity and voting stake in the company. The second largest shareholder was Seiff with a 10.4 percent interest. In 1999, Bluefly also continued to add major brands and labels, so that by the holiday season of 1999 it boasted some 150 brands and 200 labels. It also struck additional portal deals with American Online, MSN, Excite, Netcenter, Go Network, and Tripod, and established deals with a number of leading magazines--including Harper's Bazaar, Esquire, Marie Claire, and Metropolitan Home--to provide original trend content to the site. In addition, the company improved its infrastructure, adding several new computer servers to handle the increasing volume of activity on its site. By the end of 1999, Bluefly was the number-three apparel retail site in terms of sales. It posted net sales just short of $5 million, but like so many Internet startups its burn rate of money greatly exceeded its ability to generate sales. Bluefly in 1999 recorded a net loss of nearly $13.2 million.

While Bluefly struggled to establish itself as a profitable business, it was certainly better off than two off its main Internet

Further Reading:

  • Dillon, Nancy, "Tycoon Shores up Failing Discount E-Tailer with $2 million Cash Infusion," New York Daily News, October 21, 2003.
  • Hakim, Danny, "Soros Group Said Ready to Take Over Bluefly," New York Times, October 13, 2000, C7.
  • Owens, Jennifer, "Pivot Rules Files for IPO to Raise about $8.4 Million," Daily News Record, March 14, 1997, p. 2.
  • Salfino, Catherine, "Pivot Rules Prospers by Making up Some Rules of Its Own," Daily News Record, October 9, 1995, p. 10.
  • Thilmany, Jean, "Bluefly.com: The Pains and Gains," WWD, July 28, 1999, p. 25.
  • Welling, Deanna, "Investors Have Said 'Shoo Fly' to Bluefly," Apparel Industry Magazine, August 2000, p. 56.

Source: International Directory of Company Histories, Vol.60. St. James Press, 2004.

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