Why Cutting Off XLA Fiber is a Tough but Necessary Decision for Dow

Last Updated May 12, 2010 4:30 PM EDT

Citizens of Humanity Jeans with XLAThe road to a company's profitability is often paved with management lessons that are as easy to swallow as jagged little pills. But in the case of Dow Chemical's (DOW) announcement to cease production of its XLA stretch fiber brand, it's a horse pill befitting the $58 billion chemical manufacturing behemoth.

With good reason. Dow's XLA appeared the prince charming to fashionistas-in-distress across the globe. Having long searched for the perfect jeans (think premium materials, chic styling, and butt enhancement) Dow's XLA promised to deliver. When added to denim, the world's first and only olefin-based stretch fiber accentuated the assets of the fabric from treatment (could withstand high temps and harsh chemicals in the dye process) to durability (holds its shape wash after wash) and comfort (soft as cotton).

As such, XLA's introduction to the market brought Dow a slew of partnerships with designer brands such as Alice + Olivia, Paige Premium Denim (with a big marketing push tying in to the movie Confessions of a Shopaholic), and Citizens for Humanity. Citizens was a featured brand in the production of high concept online videos and print ads -- a significant investment on Dow's part.

XLA was continuing to form partnerships as recently as February, with the addition of a collection by Alexandra plc, a leading UK workwear brand owner. The problem is that Dow's been in financial hot water for the past couple of years, most notably over the acquisition of rival Rohm & Haas in a $15.3 billion deal that put Dow in the hole to the tune of over $25 billion. It was a figure that no amount of super fibers -- or investors -- could afford to float, according to analysts.

To dig itself out last year, Dow sold Morton Salt for $1.7 billion and signed two separate sale agreements for its calcium chloride business and its interests in Total Raffinaderij Nederland (TRN), Dow's joint venture with Total S.A., to Valero Energy Corporation (VLO).

The resulting cash infusion was part of the company's aggressive de-leveraging plan "designed to pay down debt, preserve financial flexibility, streamline its portfolio, and improve cash flow." Dow also completed sales of non-strategic assets in 2009 in excess of $2.6 billion, which the company said was well ahead of its original divestment plan.

Indeed by this February, Dow repaid the $9 billion bridge loan it used to buy out Rohm & Haas, a move that led to an S&P upgrade on the company to stable. Dow's management continues to playing cautious and repair the balance sheet with additional asset sales and further streamlining of its product lines.

As Dow's XLA takes a final turn on the runway, its competitor Invista is in an enviable position â€"- currently that company's XFIT lycra is alone in the spotlight. It's now up to Invista's management to grab all the market share it can to ensure its place on denim clad bottoms the world over.

Image via Dow Chemical XLA