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Photos: Getty Images
Photos: Getty Images

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Nasty Gal's Uncertain Future: Does It Have What It Takes to Stay on Top?

Decoding what the company's latest round of funding really means.

Last month, Nasty Gal announced that it raised another $16 million in a Series C round led by former J.C. Penney CEO Ron Johnson and venture capital firm Index. It was a surprisingly small amount, given that it raised $40 million in its previous round of funding; companies eager to scale (which in Nasty Gal's case translates to opening more physical stores) often raise more money as the business progresses.

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At the time of the investment, Nasty Gal founder Sophia Amoruso told Recode that she was proceeding with caution because she wanted to maintain as much of a stake in the business as possible. The company also planned on taking a conservative approach to rolling out stores, though it has opened two Los Angeles outposts in a matter of months.

That's sensible, to be sure. But while Amoruso has been wildly savvy about how she presents herself to the public and the media, Nasty Gal seems to be at somewhat of a standstill. For the past three years, the retailer has been quoting annual sales at in-and-around $100 million. Whatever that number, it’s fair to say the 500% annual growth that the brand boasted about in its early years is long gone.

Nasty Gal's first brick-and-mortar store opened in LA in November.

There have been three rounds of layoffs — which have been explained away by restructuring — and turnover is notably high. "In the year and change that I worked there, I reported to five different people, watched over 30 people get laid off and a handful fired without any write-ups or warnings, and saw over 15 people quit in my department alone," says one Glassdoor reviewer, who posted on March 30. (I reached out to Nasty Gal reps for comment on the Glassdoor reviews, which Racked first reported on last summer, as well as clarification on revenue figures and information regarding the company's retail strategy; there has been no response.)

There have also been changes at the top. Amoruso, who founded Nasty Gal as an eBay vintage shop in 2006, stepped down as CEO of the Los Angeles-based company in January to focus on keeping the brand in line creatively. She was replaced by then-president Sheree Waterson, who was previously chief product officer at Lululemon. Yep, the woman behind the too-sheer yoga pants.

Sophia Amoruso at the Melrose store opening.

The change made sense strategically, since Amoruso has absolutely no experience running a hundred-million-dollar company that many are hoping will become a billion-dollar one. Then again, she had no experience running a second-hand shop when she logged onto eBay nearly a decade ago. What is clear, however, is that Amoruso’s biggest strength is brand construction. Her May 2014 book, #Girlboss, was likened to a Lean In for millennials. Not to mention, it was a New York Times bestseller. (#Girlboss, by the way, has been hashtagged on Instagram more than 300,000 times.) "She's really good at branding herself," said one former employee, who would only speak with Racked under the condition of anonymity.

But none of these tidbits make Nasty Gal special. Try a little plug and play and it’s easy to equate the rise of Nasty Gal to pretty much any other startup that hasn’t grown as fast as it should have. What differentiates it is its category: Fashion.

Apparel retail, especially affordable apparel, relies heavily on trends. That doesn’t necessarily mean the trends we see on the runway, but rather trends in consumer sentiment. Here’s how it typically plays out: One retailer taps into some larger cultural movement (think Abercrombie & Fitch circa 1996, J.Crew circa 2005, Lululemon circa 2009) and others are forced to follow in order to remain relevant. With Nasty Gal, Amoruso led the micro-trend of editorially-driven resale shops, and was smart to channel that into selling fast fashion online, looking to the successes of major retailers both offline and on, including H&M and ASOS.

Nasty Gal sells its own brand alongside select vintage pieces and items from liked-minded lines like Motel and Finders Keepers, merchandised to a T. While the pieces on their own could often be construed as skanky or cheap-looking, Amoruso manages to add a certain polish that makes them less intimidating. Once, a fellow reporter asked me to comment on (aka criticize) the fashions turned out by then-struggling Urban Outfitters for a story he was writing. I declined, mostly because I found extremely similar pieces on Nasty Gal’s website. They were just presented in a more appealing way. (Interestingly enough, former Nasty Gal creative director Joanna Ewing — who started at the company in April 2011 and left in January 2013 — worked for Urban both before and after her tenure.)

Like any other trend-driven retailer with a specific attitude, it’s difficult to imagine Nasty Gal keeping up with the next generation of "edgy" teens and twentysomethings. In retail, it’s impossible to get it right every time. Name one youth-driven brand that has consistently outperformed the competition for more than a few years.

What’s more, the lifespan of these sorts of brands is bound to shrink as trend cycles speed up. It took more than 20 years for Delia’s — sweeter in attitude than Nasty Gal, but similar in that it was super special when it first opened in 1993 — to liquidate. (It’s also interesting to note that, although on the decline, Delia’s did $137 million in sales in 2013.) Whether or not Nasty Gal will have two decades to make a go of it is unclear. The immediacy of the internet has made shoppers more impatient than ever before. Will they stick around for Amoruso?

Those who have left the company aren't so sure, citing the low quality of Nasty Gal-produced items. "People were buying things because of how great they looked online, but when they received them in the mail, they were disenchanted," said the former employee. "It was a little overpriced for what it really is. Something that was $48 or $50 was $18.95 or $20 or $30 at H&M."

Regardless of whether the product is up to snuff, Nasty Gal will need its IRL outposts to be a hit. So far, the response to the design and the merchandising of the stores has been positive. "[Physical] stores are the new black in the world of e-commerce," says Scott Galloway, professor of marketing at NYU's Stern School of Business and founder of consumer-brand research firm L2. "Pure-play e-commerce can scale faster than brick-and-mortar, but then there’s a certain friction. The moment you are on Amazon’s radar, they will begin to look into your category. One of the most impactful ways to market a brand to somebody is to offer them a great in-store experience."

This is where Johnson, who spent years in merchandising and retail at Target and Apple, comes in. He understands what it takes to appeal to specific, design-driven demographics; Amoruso gets young women. There should be, as they like to say in the tech world, a lot of "synergy" there. The brand’s second store just opened in Santa Monica, mere months after its first debuted on Melrose. "We have two stores. What happens when we have 20?" Amoruso posed in a recent hedge-betting interview with "There are no aggressive rollout plans, per se. There are no plans for any other businesses. We’ve established ourselves in a way that is still very new."

Amoruso might like to play the role of cautious founder when making any forward-looking statements to the media, but that doesn’t change the fact that she has raised a total of $65 million, and is undoubtedly feeling pressure from her investors to regain some of the company’s earlier momentum.

Will her efforts be enough to make Nasty Gal, say, the next Warby Parker, whose eight physical stores are not only profitable, but also sell an average of $3,000 per square foot annually? Of course, Warby is selling something much less dictated by emotions. Even if you wear contacts, you probably need glasses too. Just because you wear clothes doesn’t mean you need a $158 fringed suede bra.

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