Blue Holdings Slipping

Press release:

Blue Holdings, Inc. (NASDAQ: BLUE), a designer, manufacturer and distributor of high-end fashion jeans and denim apparel, today announced financial results for the three and nine months ended September 30, 2006.

Three Months Ended September 30, 2006

Net sales for the third quarter of 2006 were $14.6 million, a 4.8% increase over the $13.9 million reported in the prior year period. Net loss for the quarter was $(0.4) million versus net income of $2.4 million for the third quarter of 2005. Basic and diluted net loss per share were $(0.02) on 26.1 million weighted average shares outstanding versus net earnings of $0.09 on the same number of shares for the third quarter of 2005. Net sales and earnings for the quarter were negatively impacted by a combination of factors. The Company received late deliveries of a significant amount of both Taverniti and Antik product in the June and July period. This caused cancellations from some key accounts as well as a loss of re-orders. Additionally, the Company was impacted by inventory produced in anticipation of the distribution agreement in Europe with Global Fashion, as well as resources and expenses committed to the terminated transaction with Long Rap, Inc., the proprietor of the Up Against the Wall retail chain.

Blue Holdings' gross profit decreased to $4.4 million, or 30.5% of net sales in the third quarter of 2006 compared to $7.0 million, or 50.1% of net sales in the prior year period. The decrease in gross profit was due to discounts given to close out delayed inventory and inventory produced in anticipation of the distribution agreement in Europe.

Selling, distribution and administrative expenses were $4.3 million in the quarter, up from $3.3 million in the prior year period. Of these expenses, approximately $64,000 was related to one-time non-recurring expenses arising in connection with the opening of the San Francisco store in September 2006. Operating expenses, as a percentage of sales, increased to 29.4% as compared to 23.5% in the prior year period. In addition to these expenses, we had a one-time non-recurring charge under other expenses amounting to approximately $500,000 arising in connection with the terminated transaction with Long Rap, Inc.

"While we are disappointed with our quarterly results, we remain confident and excited about the many opportunities we see ahead for Blue Holdings," said Paul Guez, Chairman, Chief Executive Officer and President of Blue Holdings, Inc. "The termination of the Up Against the Wall deal, the production delays and the termination of our negotiations with Global Fashion to distribute our products in Europe, negatively impacted our third quarter. Although we experienced these difficulties, we remain committed, focused and optimistic about the growth of our business. Specifically, our brands continue to perform strongly and meet our expectations. The Life & Death brand, which we recently acquired a 50% interest, has been very well received by our top retailers and department stores and is off to a strong start. In addition, the Company's San Francisco store is performing above initial expectations, and is doing an exceptional job of showcasing the Company's brands. The store has experienced very strong sell-throughs of all the Blue Holdings brands and products."

Nine Months Ended September 30, 2006

For the nine months ended September 30, 2006, net sales were $41.6 million compared to $24.6 million in the same period last year. Net income was $2.0 million, or $0.08 per basic and diluted share compared to $3.9 million or $0.15 per basic and diluted share in the same period of last year. Gross profit for the nine months ended September 30, 2006 was $17.8 million or 42.8% of sales compared to $12.2 million or 49.7% in the same period of last year.

2006 Outlook

The Company has revised its outlook for the year. Previously, the Company expected net sales for 2006 to be in the range of $60 million to $70 million. The Company is now projecting sales for 2006 to be in the range of $50 million to $52 million. The Company now sees gross margins for 2006 to be in the 42%-45% range. The primary reason for the lowered guidance is the termination of negotiations with Global Fashion to distribute our products in Europe and the spillover effect of late delivery of product from our vendors in the third quarter.

Press Release