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Kuhlman Still Seeks the Right Fit

By Scott Carlson
From St. Paul Pioneer Press, Wednesday, November 8, 2006

Scott Kuhlman had something big in mind a year ago for his Minneapolis-based men's and women's apparel company: upwards of 200 of his namesake retail stores dotting the U.S. by the end of 2006.

Today, Kuhlman's plans have had a big setback.

Scrambling in recent weeks to stay in business, Kuhlman Co. has hired Minneapolis-based Manchester Cos. to help it develop a restructuring plan.

Its stock has fallen from a 52-week high of $3.37 to a closing price of 11 cents Monday. It has agreed to delist its shares from American Stock Exchange after falling out of compliance with listing requirements. The company intends to have its shares traded on the OTC Bulletin Board.

From a peak of 50 stores in May, Kuhlman now has 29 locations, including four in the Twin Cities. "We are good on the aesthetics but it is the business operations side where we need help," said Kuhlman, company co-founder and chief executive officer.

That the company needs help is borne out by its financial results since going public last year in a merger with Gaming Venture Corp. U.S.A. The retailer posted a net loss of $8.7 million for the first half of 2006, more than triple the company's $2.2 million loss for the same period a year ago.

In an interview, Kuhlman said his company is not on the brink of bankruptcy. "We are just pulling in the reins in an effort to get profitable and self sustaining as quickly as we can,'' he said. "We are regrouping. That is priority No. 1.''

But in mid-September, Kuhlman Co. found itself in a precarious financial position. In a securities filing, the company warned that if it didn't obtain third-party financing within two weeks, it faced possibly shutting down.

Kuhlman Co. dodged that bullet days later when it secured $1.75 million in debt financing from Cornell Capital Partners, a private equity fund. That firm could not be reached for comment. "In a small business, cash is king and we didn't have a lot of it,'' Kuhlman said. "We closed on that deal and got out of that situation.''

Kuhlman Co. has an additional $750,000 in financing from Cornell Capital riding on special shareholders meeting set for Monday.

"The company may not receive additional financing from Cornell Capital Partners until the number of shares of authorized common stock is increased,'' Kuhlman Co. said in a securities filing last month. Kuhlman Co. is seeking stockholder permission to increase its number of authorized shares from 72 million to 160 million.

Still, Kuhlman wouldn't speculate on whether his company's problems are over. While the company is in good shape now, Kuhlman said the retailer still has a "long road ahead of it.'' Besides its stores, Kuhlman Co. also has agreements to design a limited line of apparel for the Kohl's and Sears department store chains. Currently, those agreements result in commission income for Kuhlman.

Kuhlman blamed his company's troubles on misjudging where its stores would work best. Three years ago, when Kuhlman and his wife, Susan, launched their business, the company expected shopping malls would be the strongest retail venues for its stores.

"There is a ramp-up period (for new stores) and the beauty of malls is they bring traffic,'' Kuhlman said. "But are they people who are going to buy your product?'' Too often, the mall crowd wasn't a Kuhlman crowd.

Kuhlman Co. has discovered its niche primarily is small-box shops in "re-gentrified'' neighborhoods, he said. The company's core customers defy typical age and income demographics, Kuhlman said. He identifies them as "lifestyle'' consumers, people who are news junkies, Internet savvy and fashion conscious with a tendency to patronize the shops and restaurants where they live and work.

But Kuhlman Co. compounded its problems when it changed its retail concept in the midst of its big ramp-up, said Luis Padilla, Kuhlman Co.'s chief executive officer for 10 months until he resigned in September.

Initially Kuhlman Co. sold only higher-end men's dress shirts for either $55 or $75 apiece. Then, nearly "overnight,'' the retailer branched out into a full "lifestyle brand,'' offering other men's apparel and expanding its reach into women's clothing, said Padilla, who mainly served as an advisory CEO at Kuhlman and was paid only in stock ownership in the company.

"You have to build a strong, understandable business model before you begin to grow,'' said Padilla, a veteran retail executive whose résumé includes stints at Target Corp. and Sears.

Kuhlman sold 805,000 shares of stock in his company in February and March of this year for $1 to $2.10 a share. Total proceeds came to $1.14 million. In October, he bought 25,000 shares for 13 cents a share.

He said one plus for his company, as it has begun restructuring, is that it "signed a lot of short-term leases. We have been able to move into gentrified store locations.''

Tim Bloom, a Twin Cities retail real estate broker, believes Kuhlman's play to more-affluent consumers hinges on its stores being in the right locations. "There are limited locations where you can put it (a Kuhlman store) because they appeal to a limited segment of society,'' said Bloom, a vice president of retail at real estate firm CB Richard Ellis in Bloomington and previously the owner of Nate's Clothing in downtown St. Paul.

Meanwhile, around town, Kuhlman Co. has hardly made a blip on the radar screens of some other local retailers.

"I don't know much about them,'' said Mitch Avery, the owner of Dana's, a Twin Cities-based specialty retailer of women's apparel. "Nobody talks about them. How does that happen that a company like this skates by without our knowing about them?''

Avery said Kuhlman Co.'s Web site isn't helping to correct that problem. Currently, the company's home page tells visitors "Kuhlman Digital-Coming Soon,'' with no pictures of what it sells.

Kuhlman said his company took down its prior Web site several months ago because it was not well suited to handle e-commerce. He said Tuesday the company expects to get an interim site up before Thanksgiving and then unveil a new "world-class'' permanent one in early 2007.


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