Three stores closing at DeSoto Square mall

 As dismal retail conditions continue nationwide, three stores at the DeSoto Square mall are scheduled to close.

Corporate and mall officials Wednesday confirmed Old Navy, Waldenbooks and Lady Footlocker will close by the end of the month.

DeSoto Square mall spokeswoman Kimbra Hennessy said the last day of business for Waldenbooks is Jan. 24. Old Navy’s last day will be Jan. 26, and Lady Foot Locker will close Jan. 31.

The scheduled closings come at a time when U.S. retailers saw sales drop by 2.7percent in December, the sixth straight month of sales declines.

“Given the challenging economic environment, these closings aren’t surprising,” said Les Morris, spokesperson for Simon Property Group, which owns De-Soto Square mall. “All three closings are due to corporate decisions.”

At the DeSoto Square mall on Wednesday morning, closing signs were posted throughout Waldenbooks, whose parent company is Borders Group, Inc.

Bonnie Schmick, spokeswoman for Borders, said the Waldenbooks was an underperforming store.

“It’s closing as part of our previously announced initiative to right-size the Waldenbooks segment by closing underperforming stores,” Schmick said. 

In March 2007, Borders announced it was planning to close 250 underperforming Waldenbooks over a two-year period. Waldenbooks closed 124 stores from the fourth quarter of 2006 through 2007.

Borders Group Inc. reported an 11.7 percent decline in its holiday sales for the nine-week period ending Jan. 3. Schmick said each store usually has about 10 employees.

“We certainly will make every effort to place qualified employees at a nearby Waldenbooks or Borders store,” Schmick said.

No closing signs were posted at the Old Navy on Wednesday, however, there was limited inventory on the sales floor.

Several shelves and display tables were vacant near the back of the store and clearance signs of up to 75 percent off were posted through much of the store.

Reasons for Old Navy’s closing weren’t disclosed by Catherine Rhoades, spokeswoman for Gap Inc., which owns Gap, Old Navy and Banana Republic.

Also, Rhoades would not disclose how many employees work at the Old Navy. 

However, she said performance, the number of stores on the market and lease terms are common factors that lead to a store closing.

Rick McAllister, president of the Florida Retail Federation, said closing underperforming stores has always been a common practice by corporations, regardless of the economy. 

“Typically, that’s OK because they’re opening a similar number of stores elsewhere,” McAllister said. “But what you’ll see in this economy is retailers being more careful about the number of stores they’re opening.”

Store closures in a mall can often be due to costly lease terms, he said.

“What you see in a lot of mall situations is the lease factors,” McAllister said. “A lot of those contracts were made when times were booming, now retailers are asking malls what these leases should be.”

Simon Property Group and mall officials wouldn’t discuss specifics regarding leases at the DeSoto Square mall.

Morris said most of Simon’s 164 regional malls had an average occupancy rate of 92.5percent.

According to Hennessy, the DeSoto Square mall has at least 100 shops.

“Our retailer mix remains strong at DeSoto Square mall and we will fill the space with interesting and compelling retail concepts that will further enhance the shopping experience at DeSoto Square mall,” she said.

Civil Rights - Eyes on the Prize 8 - Boycott Victory

SUPPLY AGREEMENT: Cone Mills and Levi Strauss

Here is a sample contract agreement between Levi Strauss and Cone Mills:

SUPPLY AGREEMENT

----------------THIS IS A SUPPLY AGREEMENT dated as of the 30th day of March, 1992(the "Agreement"), between CONE MILLS CORPORATION, a North Carolina corporation("Cone"), and LEVI STRAUSS & CO., a Delaware corporation ("LS&CO.").

WHEREAS, Cone is a major supplier of LS&CO. and LS&CO. is Cone'slargest customer; and

WHEREAS, Cone and LS&CO. have maintained, for more than 75 years, aunique, cooperative supplier/customer relationship for the development of ConeXXX denim fabrics used in the LS&CO. 501(R) family of jeans, a relationshippremised in part on management compatibility and continuity; and

WHEREAS, Cone and LS&CO. desire to solidify their relationship andassure its continuity;

NOW, THEREFORE, in consideration of the premises and other good andvaluable consideration, receipt of which is acknowledged, it is agreed: (Source: onecle.com)

When Walmart Met Levi Strauss

Fast Company 17 Dec 2007 reports in an article entitled "The Wal-Mart You Don't Know" by Charles Fishman:

But as Wal-Mart has grown in market reach and clout, even manufacturers known for nurturing premium brands may find themselves overpowered. This July, in a mating that had the relieved air of lovers who had too long resisted embracing, Levi Strauss rolled blue jeans into every Wal-Mart doorway in the United States: 2,864 stores. Wal-Mart, seeking to expand its clothing business with more fashionable brands, promoted the clothes on its in-store TV network and with banners slipped over the security-tag detectors at exit doors.

Levi's launch into Wal-Mart came the same summer the clothes maker celebrated its 150th birthday. For a century and a half, one of the most recognizable names in American commerce had survived without Wal-Mart. But in October 2002, when Levi Strauss and Wal-Mart announced their engagement, Levi was shrinking rapidly. The pressure on Levi goes back 25 years--well before Wal-Mart was an influence. Between 1981 and 1990, Levi closed 58 U.S. manufacturing plants, sending 25% of its sewing overseas.

Sales for Levi peaked in 1996 at $7.1 billion. By last year, they had spiraled down six years in a row, to $4.1 billion; through the first six months of 2003, sales dropped another 3%. This one account--selling jeans to Wal-Mart--could almost instantly revive Levi.

Last year, Wal-Mart sold more clothing than any other retailer in the country. It also sold more pairs of jeans than any other store. Wal-Mart's own inexpensive house brand of jeans, Faded Glory, is estimated to do $3 billion in sales a year, a house brand nearly the size of Levi Strauss. Perhaps most revealing in terms of Levi's strategic blunders: In 2002, half the jeans sold in the United States cost less than $20 a pair. That same year, Levi didn't offer jeans for less than $30.

For much of the last decade, Levi couldn't have qualified to sell to Wal-Mart. Its computer systems were antiquated, and it was notorious for delivering clothes late to retailers. Levi admitted its on-time delivery rate was 65%. When it announced the deal with Wal-Mart last year, one fashion-industry analyst bluntly predicted Levi would simply fail to deliver the jeans.

But Levi Strauss has taken to the Wal-Mart Way with the intensity of a near-death religious conversion--and Levi's executives were happy to talk about their experience getting ready to sell at Wal-Mart. One hundred people at Levi's headquarters are devoted to the new business; another 12 have set up in an office in Bentonville, near Wal-Mart's headquarters, where the company has hired a respected veteran Wal-Mart sales account manager.

Getting ready for Wal-Mart has been like putting Levi on the Atkins diet. It has helped everything--customer focus, inventory management, speed to market. It has even helped other retailers that buy Levis, because Wal-Mart has forced the company to replenish stores within two days instead of Levi's previous five-day cycle.

And so, Wal-Mart might rescue Levi Strauss. Except for one thing.

Levi didn't actually have any clothes it could sell at Wal-Mart. Everything was too expensive. It had to develop a fresh line for mass retailers: the Levi Strauss Signature brand, featuring Levi Strauss's name on the back of the jeans.

Two months after the launch, Levi basked in the honeymoon glow. Overall sales, after falling for the first six months of 2003, rose 6% in the third quarter; profits in the summer quarter nearly doubled. All, Levi's CEO said, because of Signature."They are all very rational people. And they had a good point. Everyone was willing to pay more for a Master Lock. But how much more can they justify?"

But the low-end business isn't a business Levi is known for, or one it had been particularly interested in. It's also a business in which Levi will find itself competing with lean, experienced players such as VF and Faded Glory. Levi's makeover might so improve its performance with its non-Wal-Mart suppliers that its established business will thrive, too. It is just as likely that any gains will be offset by the competitive pressures already dissolving Levi's premium brands, and by the cannibalization of its own sales. "It's hard to see how this relationship will boost Levi's higher-end business," says Paul Farris, a professor at the University of Virginia's Darden Graduate School of Business Administration. "It's easy to see how this will hurt the higher-end business."

If Levi clothing is a runaway hit at Wal-Mart, that may indeed rescue Levi as a business. But what will have been rescued? The Signature line--it includes clothing for girls, boys, men, and women--is an odd departure for a company whose brand has long been an American icon. Some of the jeans have the look, the fingertip feel, of pricier Levis. But much of the clothing has the look and feel it must have, given its price (around $23 for adult pants): cheap. Cheap and disappointing to find labeled with Levi Strauss's name. And just five days before the cheery profit news, Levi had another announcement: It is closing its last two U.S. factories, both in San Antonio, and laying off more than 2,500 workers, or 21% of its workforce. A company that 22 years ago had 60 clothing plants in the United States--and that was known as one of the most socially reponsible corporations on the planet--will, by 2004, not make any clothes at all. It will just import them.

In the end, of course, it is we as shoppers who have the power, and who have given that power to Wal-Mart. Part of Wal-Mart's dominance, part of its insight, and part of its arrogance, is that it presumes to speak for American shoppers.

If Wal-Mart doesn't like the pricing on something, says Andrew Whitman, who helped service Wal-Mart for years when he worked at General Foods and Kraft, they simply say, "At that price we no longer think it's a good value to our shopper. Therefore, we don't think we should carry it."

(Source: Fast Company)

Levi's jeans ride into the sunset

Oliver Poole from the UK Telegraph reports from Los Angeles on 26 Sep 2003:

Levi Strauss, the jeans company that became an icon of American culture, is heading west - so far west that its clothes will no longer be made in the United States.

The firm is to close its last factories in North America and will instead rely on plants in the Far East.

It blamed high labour costs for the decision, ending a history of producing jeans in America that stretches back to the California Gold Rush of the 1850s.

Although the company's headquarters will stay in San Francisco, its two remaining plants in the United States, in San Antonio in Texas, will close at the end of the year. Its final two North American factories, in Canada, will cease production next March. In total, nearly 2,000 jobs will be lost.

The news was greeted with dismay, even among people associated with the firm. Stephen Walker, who conceived Levi's British advertisements in the 1980s, said few items were as linked in the public's mind with being all-American.

"Cowboys and cars driving in the desert, Harley-Davidsons and rebellious young men: no other brand had the authenticity,"he said.

Union leaders said the decision went against everything the family-controlled company used to stand for. The image of the cowboy in his Levi's, rivets glittering in the desert sunlight, has been one of the most potent and enduring of all-American images for decades.

Levi's plants once dotted south Texas from San Angelo to the Rio Grande. The jeans' design was originally produced to cope with the rigours demanded of it by miners heading to California with the dream of finding gold.

But Levi's maintains that the move is an inevitability of global economics and that even Americans on minimum wages cannot compete with cheap overseas labour.

In the past few years the company suffered as fashion moved away from its classic 501 line, worn by teenagers and adults alike in the 1980s and early 1990s. New competitors, such as Gap and Diesel, became the designer label of choice for consumers.

After hitting all-time record sales of $7.1 billion (£4.5 billion) in 1996, last year it posted sales of $4.2 billion (£2.6 billion).

Phil Marineau, the company's chief executive, said that to cut costs the company would in future be producing none of its own jeans, contracting out the process instead.

All orders will now be produced by businesses located in countries such as China and Bangladesh and the world's most famous denim company will no longer make jeans, just design and market them.

It is a business model that most of its rivals have already adopted. Levi's main American competitors - Lee and Wrangler - led the way in moving out of manufacturing at home.

On Wednesday the Cone Mills Corporation, the largest denim manufacturer in the US, declared bankruptcy as it lost its struggle to compete with labour wages abroad.

Bruce Raynor, the president of Unite, the largest apparel workers' union, said the job losses in the clothing industry were the result of US trade policies that allowed companies to "scour the globe for the cheapest, most vulnerable labour".

By 2010, only 10 per cent of the US economy is predicted to be in manufacturing.

Ghosts in the Department Store

From the New York Times on 24 December 2005 in an article by Michael Barbaro:

WASHINGTON - Perhaps no city in America has buried more hometown department stores than this one. First it was Lansburgh's in 1972, then S. Kann Sons in 1975, Garfinckel's in 1990 and Woodward & Lothrop in 1995. Each closing, from bankruptcy or buyout, brought more grief than the last.

So now, with Washington's last local department store, the Hecht Company, set to disappear after Christmas, what kind of public outpouring can be expected?
"It's not a big deal to me," said Deloris Scott, 49, who has shopped at the chain for more than a decade.

Dietrich Maager, 62, standing in the men's department of the chain's downtown store, asked and answered his own question: "Will I miss it? No."

So much for nostalgia. For nine regional department stores whose grand family names have defined communities for the better part of a century - Kaufmann's in Ohio, Famous-Barr in Missouri, Meier & Frank in Oregon, to name a few - it has come to this.

Shoppers say the stores have already lost their local identities and, with it, their customers' loyalty.

So when it became clear that these storied local brands would be unceremoniously replaced by Macy's stores as part of a merger of the Federated and May chains, consumers responded, for the most part, with a collective shrug. In Boston, the excitement was tangible when rumors began to swirl that the downtown Filene's building, which will be sold by its new owner, might be replaced by a Target.

It is an ignoble denouement for a collection of family merchants that profoundly shaped American culture, turning what had merely been an idea - a consumer democracy, where fashion and luxury were available to anyone to try on, buy or aspire to - into a brick-and-mortar reality.

But it is not, in the end, a surprising one. The regional department store has struggled for relevance and profits for decades. Its sprawling, one-stop-shopping structure, so vital to its early success, made it an all-too-easy target for competitors. Entrepreneurs began to bite off business, one department at a time, until there was nothing left for the department store to call its own.

Suddenly, there was Crate and Barrel for furniture; Circuit City for electronics; Gap for casual clothes. Department stores retrenched, focusing on fashion, but not even that worked. Over the last decade, apparel sales at department stores have fallen by $7 billion, according to the NPD Group, a market research firm.

Mergers, intended to give department stores strength in numbers, seemed only to hurt them, turning companies with local quirks into purveyors of "numbing sameness" said Robert F. Buchanan, a retail analyst at A. G. Edwards, the financial company. (This holiday season, eight of the nine May chains feature the same purple cashmere sweater, digital camcorder and diamond necklace on their Web sites.)

Now it is a merger, once again, that will try to save the department store. Federated, which operates Macy's and Bloomingdale's, has purchased May, owner of Hecht's, Filene's, Robinson-May, Famous-Barr, Foley's, Meier & Frank, Marshall Field's, Strawbridge's, Kaufmann's and Lord & Taylor.

By fall 2006, Federated will turn about 390 of the 487 May stores into Macy's. The 54 Lord & Taylor stores, which may eventually be sold, will keep their name. Federated plans to eliminate 6,200 jobs and sell or close 80 stores in malls and downtowns where there is overlap between the chains.

Federated executives are fond of arguing that shoppers' lack of loyalty for their local department stores will make it easier for Macy's to win over communities. They hint at internal polls, never released publicly in full, that show a majority of consumers would be happy to shop at a Macy's.

But there are plenty of skeptics. "There is a high hurdle for Macy's to clear," said Burt Flickinger III, a retail consultant, who says department stores rely too heavily on aging designers, like Ralph Lauren, who have lost their connection with the legions of young consumers who have turned retailers like Abercrombie & Fitch into a white-hot success.

A. G. Edwards says sales at Federated stores open at least a year, a widely used measure of a retailer's health, have fallen three of the last four years. "They are the best in the industry, but they are losing market share year after year after year," said Mr. Buchanan, the analyst.

In an interview, Terry J. Lundgren, the chief executive of Federated, said the size of the new company would give it greater negotiating power with clothing manufacturers, and he held out the possibility that top designers would create exclusive lines for Macy's once the name change turns it into a national department store. Designers, he said, "are now coming to us" rather than the other way around.

But if consumer reaction - or lack thereof - to the coming name change is any indication, Federated faces an uphill battle. In interviews around the country, shoppers at the chains scheduled to become Macy's talked about the stores as if they were beloved family members whom they had not spoken to in years.

They expressed fondness for the brands, but many confessed they rarely bought much at the stores, relying on them for quick purchases like a pair of gloves or a bottle of perfume.

Andrew and Laree Eby, who live in Portland, Ore., came to Meier & Frank with their young daughter to see the annual Santaland display, which includes a monorail.

Mr. Eby called the chain's demise "sad, because it's a tradition." But asked if he shopped at the store, he responded, "No, and we probably won't shop at Macy's either." "We'd go to Target," he said.

There is at least one notable exception to all of this ambivalence: Marshall Field's, whose elegant State Street store in downtown Chicago, elaborate Cinderella holiday windows and widespread charitable giving have inspired fierce opposition to the name change.

A grass-roots campaign, called Keep It Fields, has created an online petition to stop Macy's from marching into the city. So far, 47,000 people have signed it.
Mr. Lundgren was worried enough about the reaction that he flew to Chicago to announce his decision to retire the Marshall Field's name, even meeting with Mayor Richard M. Daley to placate angry city leaders, who recently passed an ordinance that designates the Chicago store a city landmark.

For the most part, the diplomacy has not worked. "It's horrible," said Susan Brell, 56, as she plucked a box of Marshall Field's famed Frango mints from a Christmas tree at the flagship store. "Marshall Field's is Chicago, it's everything about Chicago and especially at Christmastime," she said. Macy's, Ms. Brell said, "is doing our city a disservice."

But there is no such organized campaign to preserve the May department stores in Portland, Boston or Washington.

Paula Bress, 52, a teacher who lives outside Boston, said the nation's remaining department stores ran together in her mind. "I think of them as all pretty similar now," she said.

A resident of Portland, Kristin Watkins, said she often browsed the 10-story downtown Meier & Frank store, with its Georgian Room restaurant on the top floor, but prefers Pioneer Place, a mall across the street. Meier & Frank, she said, has lost its luster. "Just look at the carpet," she said, pointing to a worn gray carpet in the picture-frames section of the store. "It's just not pleasant aesthetically anymore."

In Boston, home of Filene's, some shoppers mistakenly believed, after the merger of Federated and May, that the discount chain Filene's Basement, a separate entity that is owned by Retail Ventures Inc., would close, setting off a momentary panic. "I don't care about Filene's" department store, said Natalia Navarro, 22, who works at an insurance company in Boston. "So long as Filene's Basement stays here, I'm fine."

In Washington, where the four-story flagship Hecht's store rises like a stone fortress in the middle of downtown, consumers, not to mention the chain's holiday window design staff, appeared resigned to the company's fate. One sparse display, facing G Street, consisted of three perfume bottles on a podium, with a white orchid nearby. "Euphoria," read the writing on the walls. "A new fragrance from Calvin Klein."

Stephanie Weber, a 43-year-old engineer who tried to sneak some Christmas shopping into her lunch break, recalled setting up her wedding registry at Hecht's and buying "the most fabulous dress I own" there, a fancy blue sequined gown. But she is not mourning the chain.

"It's not really a local chain anymore," she said.

Reporting for this article was contributed by Brian Libby in Portland, Ore.; Gretchen Ruethling in Chicago; and Katie Zezima in Boston.

The Rise and Fall of Waterford Wedgewood

In his Irish Independent article, "The rise and fall of Waterford Wedgwood: The company best known for Wedgwood china and Waterford crystal has appointed Deloitte as administrator after debts overwhelmed it," James Thompson writes on 6 January 2009:

The cracks had started to appear a number of years ago, but more than 200 years of Anglo-Irish industrial history was in the balance last night after Waterford Wedgwood called in administrators.

The retailer and manufacturer, best known for Wedgwood pottery, Royal Doulton and Waterford crystal, appointed Deloitte as administrator, after it succumbed to hefty debts of €450m (£420m) and tumbling sales and profits. Furthermore, customers had started to baulk at its prices during the credit crunch, although the company's fate was not helped by its products falling out of fashion and formal dining largely becoming a thing of the past.

Although the administrators have already received expressions of interest in the businesses, the collapse into administration of the Waterford Wedgwood holding company and nine of its UK and Irish subsidiaries is a far cry from the booming success of the brands during much of its history - and would make the perfectionist Josiah Wedgwood, who founded the Wedgwood brand in 1759, turn in his grave.

Mr Wedgwood was the youngest of 13 children who was born in Burslem, Staffordshire, in the heart of the English potteries. In his early twenties, Mr Wedgwood started working with the most renowned English pottery maker of his day, Thomas Wieldon, and learned a wide variety of pottery techniques. After founding the company, he achieved a key early success in 1763, when he manufactured a cream-coloured tea and coffee service for Queen Charlotte, wife of George III. Subsequently, she gave him permission to use the title, Potter to Her Majesty, and call his new cream ware Queen's Ware, giving the firm an enormous boost.

However, Mr Wedgwood gained a reputation as a tough taskmaster, who had no compunction about venting his spleen if production standards at a workshop were not up to scratch. If he saw a vessel that did not meet his exacting standards, Mr Wedgwood would smash it with his stick and shout: "This will not do for Josiah Wedgwood!"

Mr Wedgwood also created black basalt, a fine black porcelain, which was his first major commercial success, and he later invented the pyrometer, a device for measuring heat in kilns.

In simple terms, one of Mr Wedgwood's great achievements was to become the first company in 18th-century England to innovate the perfect mixture of fine bone china, which was extremely popular with the British upper classes.

Before he succumbed to cancer in 1795, Mr Wedgwood had passed his company on to his sons, hence the company's official name: Josiah Wedgwood and Sons. Many of Mr Wedgwood's descendants were directly involved in the management of the company over the years and the fortunes of Wedgwood soared through much of the 19th and 20th century.
In 1986, Wedgwood was acquired by Waterford Glass Company. Waterford itself has a long and illustrious history dating back to 1783, but the company's name was changed to Waterford Wedgwood in the late 1990s, partly because Wedgwood's profits were significantly higher. In 2005, it acquired Royal Doulton, the iconic manufacturer of china, in a move that was partly designed to deliver economies of scale. At the time, Waterford Wedgwood's group chief executive, Redmond O'Donoghue, said the acquisition would "increase the volume through our factories without substantially increasing production costs".
There is no precise point when the fortunes of Waterford Wedgwood started to fade, but the writing had been on the wall for some time. Over the years, it had acquired a number of companies. Across its renowned brands, Waterford Wedgwood employed 7,700 staff in the US, Germany, Ireland, UK, Canada, Indonesia, Japan and other Asian countries.
So what went wrong? Even before the credit crunch reared its ugly head in 2007, Waterford Wedgwood, like rival fine china brands, had been struggling. Fellow Staffordshire manufacturer Royal Worcester called in administrators in November.

From a commercial perspective, Waterford Wedgwood found it increasingly difficult to compete with a raft of cheaper imported rivals, many of whom entirely used manufacturing facilities in low-cost countries, such as China.

It also suffered from retail giants, such as Ikea, parking their tanks on its lawns and starting to sell mass-produced quality products, as well as department stores, such as House of Fraser and John Lewis, upping their game. Niche players, such as Villeroy & Boch, also started to eat into its market share.

Robert Clark, a senior partner at Retail Knowledge Bank, said: "Its products are luxury items and there is an awful lot of less expensive everyday ware around that people use and are quite cheap, such as from Bhs and House of Fraser."

He added: "There are a lot of lower-priced alternatives so Waterford Wedgwood's products became more and more niche. They have become more and more sidelined into gifts and upmarket and they have been overtaken by the mass production market."

Waterford Wedgwood has also suffered from the weak dollar which until recently hit its export costs.

Laura Cohen, chief executive-designate of the British Ceramic Confederation, thinks that Waterford Wedgwood has also suffered from changing dining habits in the UK and elsewhere over the past 20 years. "Whereas dining used to be quite formal, there is a trend these days towards more informal dining," she said.
As its target market has narrowed, it's fair to say that Waterford Wedgwood has also suffered from becoming increasingly viewed as an "outdated" brand.

"Its image is associated with the older age group who put stuff on display when friends come round and then stick it back in the cupboard or on the shelves afterwards. They have failed to find a compromise between everyday tableware and more upmarket, almost collectable, brands," said Mr Clark.

That Waterford Wedgwood has fallen into administration is certainly not through a lack of trying and financial investments by its major shareholders. In recent years, the company's shareholders, including its chairman Sir Anthony O'Reilly, his brother-in-law Peter Goulandris and Lazard Alternative Investments, have pumped €400m into the company.

As a result, Sir Anthony, who is also the chief executive of The Independent's parent, Independent News & Media, and his fellow investors are nursing huge losses. In a statement, Deloitte said its management had made "exhaustive efforts to restructure the businesses. However, as trading conditions deteriorated, it became apparent that a restructuring of the business could not be achieved in an acceptable timescale".

Deloitte added: "Consequently, management began looking at the alternative strategy of trying to find a buyer for the businesses which would also have involved a comprehensive financial restructuring. While considerable progress was made, no firm offer was secured."

In recent years, Wedgwood moved a large chunk of ceramics production from Barlaston, Staffordshire, to an industrial site on the edge of Jakarta, Indonesia.
Then, in 2005, Waterford Wedgwood announced the closure of its Waterford crystal factory in Dungarvan, Ireland, which resulted in large-scale job losses.

The move was designed to consolidate all the operations into the main factory in Kilbarry, Waterford City, where 1,000 people were employed by the company.

However, Ms Cohen says that Waterford Wedgwood has also invested in new technology, such as "pressure castings".

"It has tried very hard to review their production and processes where it is possible today," she said.

It is understood that Deloitte has already received a number of expressions of interest from both financial and trade companies interested in buying some of the businesses. Sources said that Deloitte was meeting one of the parties yesterday. Whether a bid for the entire company will emerge is unclear, but the brands alone, if sold separately, would attract a huge amount of interest.
For the time being, Waterford Wedgwood's UK factory in Barlaston will resume production next Monday after an extended holiday period hiatus. Its overseas operations, including retail stores and manufacturing plants in Indonesia, will also continue - although they are likely to soon become part of the administration and associated sale process.

However, the company's financial woes tell their own story. For the six months to 4 October, Waterford Wedgwood posted a net loss of €75.8m, compared to a €57.1m loss in the first half of 2007. Its first-half sales tumbled by 15.4 per cent to €207.6m.

The administration of Waterford Wedgwood puts at risk the jobs of 1,900 staff in the UK, and a further 5,800 worldwide. However, Ms Cohen said that she was confident the business would "survive" and take forward its important brands. She also stressed that its factory in Barlaston was not the only one in the famous potteries area, citing Emma Bridgewater, Churchill and Steelite.
While there may be bigger administrations facing British industry, it would be a sad day if the brands of Waterford Wedgwood were to just become part of an industrial museum. If Wedgwood's founder were alive during the credit crunch, he would surely say: "This will not do for Josiah Wedgwood!"
- by James Thompson

From LA Gear to Skechers

Julie Sloane reports in Fortune Magazine on 31 March 2003 on the rise and fall of LA Gear's Robert Greenberg and his new shoe venture Skechers.

Ms. Sloane writes: "Waiting For The Other Shoe To Drop His first company, L.A. Gear, grew to $820 million in sales in just seven years, then fell apart. His second, Skechers, got off to a fast start too, but has stumbled lately. For Robert Greenberg, it's time to prove the skeptics wrong."

The late 1980s and early 1990s saw a lot of spectacular business flameouts--remember Michael Milken? The savings and loan debacle? Here's another from that list, less well known but almost as dramatic: L.A. Gear. Started in 1983 by a former hairstylist and wig importer named Robert Greenberg, who had no experience in the footwear business, L.A. Gear began selling aerobics shoes just as the exercise fad took off. By 1990 it was doing $820 million in sales and had become the No. 3 retailer of athletic shoes in the country, behind Nike and Reebok. L.A. Gear's stock, which started trading at $3 in 1986, made it up to $50 in 1990. Yet it all came undone almost as quickly. The aerobics trend died out, and Greenberg couldn't come up with another hot-selling product. Facing a cash crunch, L.A. Gear posted one bad quarter after another. A low point came in December 1990, when a Marquette University basketball player stumbled to the floor--on national television--after one of his L.A. Gear high-tops fell apart. In a bid to save his company, Greenberg sold part of it to outsiders, who turned around and forced him out. After limping along for another six years, L.A. Gear finally declared bankruptcy in 1998. Greenberg, however, was undeterred. He and son Michael quickly launched another shoe company, called Skechers USA, and so far the parallels between L.A. Gear and Skechers have been almost eerie. Both are fun, youthful businesses that exploded to nearly $1 billion in sales in less than a decade. Skechers is now sixth among all U.S. footwear companies. And unfortunately, just like L.A. Gear, Skechers has run into problems. Its stock has slumped, falling from a high of $40 in mid-2001 to the single digits. That includes a staggering 42% one-day plunge in December, when Greenberg warned for the third time in three months that earnings would fall short of expectations. Britney Spears, who does ads for Skechers, recently filed suit against the company, and even that has a parallel: Michael Jackson had a similar dispute with L.A. Gear in 1992.Admittedly, Skechers has a few things going for it that L.A. Gear did not, like a strong balance sheet, a roster of new projects, and a broad line of different styles that don't rely on a single trend or demographic. It also benefits from a strategy that you might call "fast and cheap" --Greenberg and his designers watch footwear trends and rush a less expensive version of what's popular into stores more quickly than competitors can. Still, with Skechers at a crossroads, some skeptics are wondering whether Greenberg, who's a proven master at starting companies, has learned from his experience and gotten better at keeping them around.

Born in 1940, Greenberg grew up in Boston working at his father's produce store and hating every minute of it. Immediately after high school he went to beauty school and then opened his own hair salon. Within a year, he notes proudly, he was making more than his father. Four other salons quickly followed, but his visions of going national faded a few years later when he hit on a new trend: wigs. As soon as Greenberg discovered he could sell a $50 wig for $350, he sold the salons and opened both retail and wholesale wig businesses, importing inventory from South Korea. By 1973 wigs were a $5 million business for Greenberg, and when they fell out of favor he switched to women's jeans, shipping them in from Asia and selling them to department stores. In all his businesses, even today, the common theme is fashion. "Things that change have opportunities in them all the time," he says. "Stodgy things don't change--no glamour, no dance shows, no hoopla."

In 1978, Greenberg left the jeans business and packed up his wife and kids for Southern California, with no idea what his next venture would be. He had enough cash in the bank to last six months. But on a family trip to Venice Beach, he was taken by something new: roller skating--and rental shops that couldn't meet demand. Ten weeks later Greenberg opened Roller Skates of America, taking in $20,000 his first week.

He attended his first footwear trade show in 1979 after getting the idea of selling sneaker-skates. But he saw something there that intrigued him even more--everyone looked rich. "In Boston if a guy didn't have any money, he would have these white salt rings around his shoes from the winter," he says. "I thought, 'By God! These footwear guys all have new shoes! When this skate thing goes away, I'm going into the shoe business!'" It didn't take long. In 1980, Greenberg says, Mattel closed its roller-skate business and liquidated more than three million pairs. The market was flooded with cheap skates, and Roller Skates of America was finished. But true to his word, Greenberg launched L.A. Gear.

He staged his entrance into the shoe business with what would become trademark razzle-dazzle. At a Chicago shoe show he drove a rented '56 T-Bird convertible onto the show floor and hired four men in black-satin L.A. Gear jackets to sell a single style of shoe in 12 colors. "Where's the variety?" buyers wanted to know. Why, Greenberg told them, the shoe comes in many sizes! "I ended up writing just $4,000 of business," he remembers. "Anybody else would have closed, but I came back happier than a clam. I had a new business."
L.A. Gear, the Greenbergs readily admit, capitalized on the rage for women's aerobics shoes. Drawing on his experience of adding glitzy back pockets to jeans, Greenberg started creating tasseled, sequined high-tops in silver, gold, and neon. Michael dropped out of college to become a sales rep. Every Saturday, Robert spent four hours waiting on customers at Sneakerland in a nearby suburb, observing who bought what. (He still likes to leave movies early and wait by the door just to watch the footwear streaming past and look for trends.) Sales shot from $11 million to $617 million in only four years. L.A. Gear pulled in celebrities like Paula Abdul and Belinda Carlisle, and in 1990 it ran ads with San Francisco 49ers quarterback Joe Montana and a single word of copy: "Unstoppable." Most people thought that was true.

But the company ran into big problems. Fashion flipped from 1980s glitz to 1990s grunge, and L.A. Gear's core aerobics product was out. Despite a concerted effort to break away from that narrow image, Greenberg never succeeded. Men's lines hawked by Kareem Abdul-Jabbar and Michael Jackson went nowhere. L.A. Gear built up a massive inventory surplus, more than 11 million pairs, most of which it was forced to liquidate. The shoes turned up at discounted prices everywhere, not only hurting margins but also antagonizing L.A. Gear's customers--the upmarket retailers still trying to sell the shoes at full price.

And there was more. In December 1990, L.A. Gear had received a $360 million line of credit from a consortium led by Bank of America. In it was a covenant stating that if L.A. Gear lost money in any quarter, the line would be pulled. Disastrously, the company posted a loss for the fourth quarter. "It was the most ridiculous covenant," says an irate Greenberg. "Whoever my financial advisors were in those days were not financial advisors." (That's a bit self-serving--he signed at the X, after all, and the company violated the covenant just weeks later.) But with no money coming in, he decided in September 1991 to sell a significant stake of L.A. Gear to Trefoil Capital Investors, a Burbank, Calif., fund specializing in turnarounds, for $100 million. He also lost his job.

"[Trefoil] stepped up with ego and power," says Sandy Saemann, Greenberg's No. 2 at L.A. Gear. "Robert was left alone with the dogs, and the dogs got rid of him."

Says Greenberg about Trefoil: "We were going to be great partners, blah, blah, blah. Sham City. They didn't know anything about the footwear business." His take on the experience: He was the only reason L.A. Gear worked, and when he left, the magic did too. "It was purely a matter of me and my abilities," he says. Greenberg's replacement as CEO, Mark Goldston, now the CEO of Internet service provider NetZero, offers a slightly different version. "The company was in disastrous shape when we took over," he says. "It was a draconian turnaround." And one that ultimately didn't work. L.A. Gear managed to stay solvent for seven more years, but sales fell steadily until 1998, when it finally filed for Chapter 11.

Within a week of leaving L.A. Gear, Greenberg had the idea for Skechers, and since then he's tried to avoid repeating his mistakes--even the ones he doesn't admit making. Instead of focusing on a single niche, Skechers is more diversified than any other U.S. shoe company, with 1,500 styles in 12 lines. There are steel-toed boots, high-heeled pumps, sandals, retro sneakers, and even roller skates. According to 2001 company data, its customers are 49% women, 30% men, and 21% children."That's never been done before," says Dorothy Lakner, an analyst at CIBC World Markets. "Timberland is primarily boots, Kenneth Cole is street shoes. There isn't anyone who's been able to build a business where the brand isn't tied to one specific kind of footwear."

What all Skechers shoes have in common is low cost. Greenberg's approach is to keep prices below those of the competition--most sell for $30 to $60. In the spring J. Crew catalog, for example, you'll find a pair of retro suede sneakers for $88, but Skechers sells a virtually identical version for just $48. (I bought a pair in maroon; call it research.) In addition, Greenberg pushes Skechers to operate faster than other shoe companies. His designers can spot a budding trend and get it onto store shelves in as little as four months.

Then there are the financials. Compared with the mess he left at L.A. Gear, the books at Skechers look healthy, with reasonable debt, a cash reserve of about $125 million, and good inventory levels. And so far he's resisted the urge to overlicense the Skechers name. L.A. Gear manufactured everything from beach towels to denim jackets, but by 1991 the products were money losers. This time around Greenberg vowed to keep Skechers focused only on shoes until it hit $1 billion in sales. In June 2002, after ten years in business, he finally announced the first deals to sell Skechers-branded watches, hosiery, and children's clothes.
For all their differences, Skechers and L.A. Gear share one big feature: public ownership. Initially, Greenberg did not want to stage an IPO with Skechers. Having already fulfilled his dream of being on the New York Stock Exchange, he didn't want the added scrutiny. "I truly was never going to go public again," he says, adding that what tipped him were his sons--all five work at Skechers--who wanted the experience. (That may be self-serving too; his Skechers stock is worth about $88 million.) Still, it hasn't been easy. "It's brutal out there, and being public adds to the brutality, which is what I like," he says. "I wanted to be a boxer when I was a kid. Wall Street beats me up all the time."

Especially lately. The company posted an $8.6 million loss for the fourth quarter of 2002, its first loss since going public. "We are pleased with our ability to maintain our share of the global footwear market ... despite the difficult economic environment," said CFO David Weinberg in a press release. That sounds reasonable enough, until you realize that other shoe companies, such as Reebok and Puma, are as healthy as ever. The U.S. footwear industry hasn't grown in nearly a decade--Americans still buy 1.3 billion pairs of shoes a year--so one company's gain means another's loss.

Part of Skechers' problem is simply competing against its past performance. It grew wildly in 2000 and 2001, and growth like that is harder to sustain the bigger a company gets. Skechers also had one product that did amazingly well in those years: a sneaker called the Energy, which sold tens of millions of pairs but has since faded in popularity. "Nobody's as good as Greenberg at coming up with hot items," says John Horan, publisher of Sporting Goods Intelligence, a newsletter. "But as you get up to the billion-dollar level, what's hard is to keep coming up with the same mix of hot items as when you were doing $300 million."

Moreover, Greenberg has yet to get out from under the shadow of L.A. Gear. "That's always in the back of people's minds," says Mitch Kummetz, an analyst at Wedbush Morgan Securities. "It overhangs the stock constantly." Even before the company's current problems, its stock traded at a far lower earnings multiple than those of its competitors. And a recent, well-publicized spat with Britney Spears hasn't helped. Skechers signed a deal to have Spears promote her own line of roller skates, but in December she filed a lawsuit accusing the company of using her name to promote its skates instead. Skechers plans to file a countersuit. But that echoes a similar fight during which Michael Jackson and L. A. Gear traded lawsuits over a signature line of shoes. That case was ultimately settled.

Greenberg, ever the fighter, says he has plans to get the company on track. Another 700 to 800 new shoe styles are headed to stores for 2003, and analysts believe the company's claim that its spring lines are selling well. Greenberg is even hatching entirely new brands, like the Michelle K collection of upmarket women's shoes that don't bear the Skechers name. With classic bravado, Greenberg sees Michelle K (named for the vice president of design, Michelle Kelchak, who appears in the ads) as the next Donna Karan and looks ahead to a line of cosmetics, handbags, and clothing.

Greenberg is also pinning big hopes on the international business. It's currently about 13% of all sales, but he'd like that to be closer to 25%. The company just opened a big distribution facility in Belgium. He has tried to cut expenses by closing a mail-order division, and he still stands--tentatively--by the goal he made public in 2001: $3 billion in sales by 2008. "Maybe 2010," he adds.

"I took it on the chin this year," he says, referring to the analysts and the less than flattering media coverage. "But greed is good. It brings them all back. When I have a big quarter, they all get back on again. Because they know I tend to--" he stops, and with a sound like a rocket ship, points his finger straight up.
However, given that Skechers is now in its tenth year, older than any company Greenberg has ever managed, it's not the "up" part that anyone doubts. It's his ability to handle the down.

Rise and Fall of LA Gear

The Turnaround Management Association Headquarters published an article entitled "The Rise and Fall of L.A. Gear" by Karen H. Wruck on 1Nov 2001:

In some sense, L.A. Gear was a quintessential 1980’s company. The notion was to capture the L.A. lifestyle. It sold pretty glitzy stuff-sequined and lamé workout shoes, Crayola-colored hightops and so forth. Although it’s still around in a very small version of its former self, L.A. Gear, with its meteoric rise and its long slide into bankruptcy, presents an interesting case study in asset liquidity, debt covenants and managerial discretion.

This is a company that went public in 1986. Its stock doubled on the first day of trading. In 1988, it got enormous public kudos, not only from trade magazines such as Footwear News but from mainstream media as well-it was number three on Business Week’s list of 100 best small businesses. It had the third-largest percentage gain on Nasdaq. In 1989, the equity reached a market capitalization of $1 billion. It was the largest appreciation that year on the New York Stock Exchange. That’s the rise of L.A. Gear.

And this is the fall. In 1990 and 1991, fashion moved from glitter to grunge. The problem was, L.A. Gear didn’t make much of a transition in terms of its style and, from 1990 to 1996, revenue declined from $820 million to $196 million. In 1998, by the time the company filed bankruptcy, the common stock was literally worth zero.

Why is the rise and fall of L.A. Gear so interesting now? For one thing, we’ve been seeing an awful lot of this rise and fall business lately in the market. Studying this case can give us insights into the kinds of failures we can expect in the high-tech and dot-com sectors over the next two or three years.

L.A. Gear designed products, outsourced its manufacturing and distributed products, but it didn’t have plants, and it didn’t have a lot of employees, even at its peak. There were not a lot of physical assets. What assets it did have were highly liquid—most of the assets were inventory, which played a critical role as its demise unfolded.

By the time the decline started, professional turnaround management was involved. They had a top management team and a board of directors, both of which had substantial equity stakes in the firm and considerable turnaround experience.

But one of the most interesting things about L.A. Gear is that it rises quickly and falls very slowly. How can this company continue for so long without solving its management strategy problems; without substantial external financing, which allowed it to escape the discipline of external markets; and without creditor or investor intervention?

Company History

L.A. Gear was founded in 1979 by Robert Greenberg. The former hairdresser and wig salesman started out by selling shoelaces in Venice Beach, Calif. He founded a trendy women’s clothing store and his fortunes started to take off. In 1983, he hired Sandy Saemann, who basically ran L.A. Gear’s advertising in-house. Their strategy was to sell predominantly through upscale department stores, such as Nordstrom.

They did something that, at least at the outset, was quite clever. They had what they called an at-once retail ordering system, which meant that retailers could order in small quantities. If they ran out, they could order again. The industry standard, at least for companies such as Nike and Reebok, was something called a futures ordering system, which basically meant that they showed you the styles for the season, you decided how many you wanted and you stocked them. If you ran out, you ran out.

So, L.A. Gear was giving retailers more flexibility in the hopes of being competitive. Perhaps behind the strategy was the notion that by not requiring retailers to order large quantities, L.A. Gear was more likely to obtain future deals, once the stores tried out the merchandise and saw how well it sold.

People said at the time that Greenberg’s fashion sense combined with Saemann’s advertising and marketing skills were the keys to the rise of L.A. Gear. With the initial success in women’s shoes, Greenberg and Saemann started diversifying.

By diversifying, the company didn’t really move into another line of business; it expanded its offerings to move beyond women’s shoes and into men’s and children’s shoes. In 1986, women’s shoes were 82 percent of sales; by 1990, they were only 35 percent of sales, so they made some progress in men’s and children’s shoes. They also added apparel lines and sold their products internationally.

In 1990, L.A. Gear made a very big push to enter the market in men’s performance athletic shoes. In some sense, this is when the company’s troubles started. It launched a line of men’s sneakers endorsed by Kareem Abdul-Jabar. No one was at all interested. The company also wanted to sell men’s leisure shoes, black shoes, sponsored by Michael Jackson. No one was interested in that idea either.

Then, the company had a problem when a pair of its sneakers fell apart, literally, on national television. A college basketball player from Marquette University who was wearing L.A. Gear shoes ended up hitting the floor because his shoes fell apart. When you’re struggling to enter men’s performance shoe market, this is not a good thing.

The result of all of this, in part, was a large inventory buildup at the end of 1990 and early in 1991. L.A. Gear had a lot of shoes that weren’t selling very well. What were they going to do with them?

If you think about the company’s brand name and positioning and who the upscale retailers were that carried them, one option might have been just to take all of the sneakers and burn them. But they didn’t do that. Instead, they dumped them. So, for a little while, you could buy L.A. Gear products at Nordstrom, at the flea market or in a back alley. It did generate some cash. However, it damaged the brand name and the company’s relationship with retailers.

The Turnaround Firm

In January 1991, L.A. Gear had a quarterly loss that triggered a technical default on its bank debt, which was carried by Bank of America. In June 1991, they had another quarterly loss, which triggered its second technical default.

Very shortly after that, a new active investor entered in the guise of a company called Trefoil. This group had a stable of successful turnarounds. They made a $100 million investment in the firm in exchange for redeemable preferred stock. They got to pick the management team, and they also got to run the board of directors.

Immediately, the company made management and governance changes. Saemann resigned two weeks after Trefoil made its initial investment. Greenberg was gone within six months. After Greenberg left, Trefoil hired Mark Goldston, who had been a Reebok executive.

Trefoil ran L.A. Gear from 1991 to 1997. It ended up selling its $100 million stake for $228,000. Bad things can happen to good turnaround people.

In six years, Trefoil had essentially three different management teams. The company struggled to settle on what kind of a firm L.A. Gear was going to be. In 1991, Goldston emphasized men’s athletic shoes and tried to rid the company of the flea market image problem. The company also implemented a futures ordering system. In 1992 and 1993, the company changed and decided to forego the men’s athletic shoe market and focus on children’s shoes. It also turned to other stores to dispose of its other merchandise. The company had a big contract with Wal-Mart and increased its mass marketing emphasis there.

By 1993, things were still going forward, but Goldston was out and William Benford was in. He had been L.A. Gear’s CFO at the time that Goldston was president. During Benford’s year at the helm, the company basically went through a period of returning to its roots. It wanted to emphasize women’s and children’s shoes. The company closed all of its outlet stores. They were still doing a lot of mass marketing sales, but they were not meeting minimum volume requirements, and Wal-Mart cut them off.

Then, L.A. Gear attempted to acquire a company called Ryka, another women’s athletic shoe company. This is a very ardent women’s self-esteem, feminist kind of company. It was described as a cause-marketing firm, as opposed to L.A. Gear, which was a glitzy cheerleader-type firm, and there was some concern that this match was not made in heaven, even though they both sold shoes for women. That fell through.

Benford’s term was over and the company still was not doing well, so Bruce MacGregor, who has been senior vice president of marketing at L.A. Gear, was named to head the company. One of the things that he tried was to say, "Our brand name is so ruined, let’s just take it off a lot of our products and see if people will sell them under different names or no name at all." He also abandoned the company’s joint ventures and tried to sell internationally.

In terms of retail financial performance, sales during this period dropped from $820 million to $196 million, and gross profit margin dropped from 35 percent to 24 percent. The company’s net income dropped from $31.3 million to a loss of $51. 7 million.

Operating Cash Flow

The high-liquid-asset structure of L.A. Gear delayed the day of reckoning by six years. Basically, L.A. Gear’s working capital liquidation was the primary source of funds to cover its operating losses over a long period of time.

The company paid all of its bank debt after its initial default, so it basically was free of intensive bank monitoring.

The company did issue some public debt, which was covenant-free, with a 10-year maturity. So, if the company managed to last 10 years, those public bondholders would get back their principal payments. In the interim, however, all the company paid back was interest.

The company did obtain bank-backed guarantees that it used for shipments from suppliers. Up to the day the company filed Chapter 11, it was using letters of credit. One of the last versions of L.A. Gear’s credit agreements extracted a $750,000 upfront fee, and by the end, the company was paying a $50,000-a-month maintenance fee to support the letter of credit.

L.A. Gear’s highly liquid asset structure was really the source of this managerial dis­cretion. The company had a lot of latitude to experiment without being required to undergo any kind of external monitoring or obtain validation for its different strategies and management teams.

They created and sustained those strong cash positions by doing what seemed practical—drawing down the company’s liquid assets. They started with very large inventory and receivable balances, and current assets declined from $338.4 million in 1991 to $96.7 million in 1996. They were about to fail, and they still had almost $100 million in current assets.

During the six years of protracted distress, you can look at the financials and see numbers like cash/interest as high as 59.1 times, current assets/interest as high as 162 times and working capital/interest as high as 118 times.

Between 1986 and 1990, L.A. Gear had had positive earnings in all years but negative net operating cash flow. All of that profit and then some—because they were borrowing from the bank at that point—was going to investment in working capital to support the firm’s growth. If you want to continue to grow like that, from $11 million in revenues to $821 million in revenues, you’re going to require the bank to lend you money.

Trefoil also had big negative cash earnings in the years it ran L.A. Gear. But once you took into account the net change in working capital, they had big positive operating cash flow. They didn’t need any kind of external financing.

Bank Constraints

There were some constraints on L.A. Gear during this period. Even though the company had retired all of its bank debt, it was still using bank letters of credit to support inventory purchases and to guarantee the producers in Asia that they would pay them for the shoes that they made. What happened was that those letters of credit had some covenants that would be renegotiated regularly. Each time, the bank reduced its exposure, but at the same time, L.A. Gear management retained substantial discretion.

Between 1991 and 1997, L.A. Gear had 14 versions of the credit agreement with Bank of America. In every one of them, the amount the firm could potentially borrow—which it never did—was reduced. Covenants were rewritten, and fees were extracted. Some of them came in the form of interest rates, but a lot of them came in the form of up-front fees.

By the end, you were seeing things like the bank saying, "We will give you another credit agreement to support your purchases, but we want $750,000 up front." And the man­agement said, "Fine." What choice did they have? Without a line of credit, they weren’t going to be able to sell anything. No producer was going to float them at this point.

In the end, when it filed bankruptcy, L.A. Gear was paying $50,000 a month in fees. These were big numbers, but the bank was protecting itself by extracting cash over time out of the company. Essentially, the rest of the cash was used to fund operating losses and strategic experimentation.

Sometimes, a bank plays a role that benefits all of the claim holders of a company. You see a triggering of the default on bank debt, which puts the firm in technical default, and suddenly, everybody pays attention. You may have a productive negotiation for all groups. In the case of L.A. Gear, that wasn’t what was going on.

Restrictions

L.A. Gear did have covenants towards the end that restricted distribution to shareholders and that prevented the firm from selling physical assets, such as a ware­house, a desk, a computer. But there’s a gray area where, as a lender, you really don’t want to write covenants that restrict managers from doing what they ought to be expert at—you want to give them the discretion to run the business the best way they can.

What’s interesting about the strategic shift in L.A. Gear is it’s not as if they tried to exit the athletic shoe industry. They would have been prevented from doing that. All the shifts they made were things that looked reasonable within their core line of business.

Who knew what the right level of working capital was at L.A. Gear? It’s very hard to write a covenant that says, "We have X dollars in working capital." But you also know that in a decline, that’s where the cash is going to come from, and that’s an area that must be watched very closely.

From a banking perspective, L.A. Gear did exactly what it had to do. At the very end, this company was not going to get letters of credit from any other banking institution, period. Sure, the fees sound high, but if Bank of America pulled its line of credit, L.A. Gear didn’t have a business. And from the bank’s perspective, it was a pretty high-risk business.

General Implications

Asset liquidity, broadly construed and not limited to cash balances, is a very important determinant of managerial discretion in a firm. The more discretion the managers have, of course, the higher the pressure that is put on the board of directors to monitor and govern well. One of the things to think about in a firm with high liquid assets is how debt contracts are structured in terms of covenants and the maturity structure of debt.

With these kinds of firms, accounting-based or non-cash covenants can be more constraining than the requirement to make principal and interest payments. People tend to think about technical defaults as being kind of an early warning and a cash default as a really serious event. But this is a group of firms for which the reverse is true.

These firms are never going to cash default until they’ve depleted the value of the firm, but they may have technical defaults earlier. It’s very important in lending to firms with high liquid asset struc tures to have debt with meaningful covenants because cash-flow constraints are not going to be particularly binding.

It’s also important to remember that liquid assets are not equivalent to negative debt from a managerial discretion point of view. A lot of times when people look at a balance sheet of a firm, they’ll say, "Okay, it borrowed $10 million, it’s got $5 million in cash, so on net, it’s about $5 million in debt."

That’s not quite true because as a lender to that firm, you may not be able to stop the expenditure of that cash for the benefit of shareholders at your expense. You cannot rely on the liquid assets lying around acting as a cushion. They’re almost a way to undermine some of your issues. You have to worry about security for debt.

Finally, shorter-term debt restricts management’s ability to buy time because when the debt expires, the company has to go back to its lender and renegotiate the debt contract. If lenders observe deterioration in the performance of the firm, they can protect themselves and extract value for the added risks.

Trefoil was a professional, highly skilled turnaround firm. They truly believed all along that they were going to turn around this company and resurrect it. Even among the best managers, there’s a tendency to take these liquid assets and continue investing in the firm, thinking that, "I’ve been successful in the past. I’m going to continue to be successful in the future."

Liquid assets increase that temptation a lot. These were good people, but they were perhaps overly optimistic about turning this firm around.

Karen H. Wruck Associate Professor of Finance The Ohio State University

Kremed!:

Kate O'Sullivan's article in CFO Magazine, published on June 1, 2005, entitled "Kremed! The rise and fall of Krispy Kreme is a cautionary tale of ambition, greed, and inexperience."

What could be more perfect than a Krispy Kreme doughnut? Hot from the fryer and loaded with sugar, the Original Glazed is practically irresistible. For a time, Krispy Kreme's stock seemed irresistible, too. When the company went public in April 2000, at the peak of the Internet whirlwind, investors flocked to buy into a business they could understand. An old-fashioned franchise based in Winston-Salem, North Carolina, Krispy Kreme Doughnuts Inc. boasted solid fundamentals, adding stores at a rapid clip and showing steadily increasing sales and earnings.

But Krispy Kreme also had a mystique. Its doughnuts, available for many years only in the Southeast, had attracted a devoted, even fanatical, customer base. When the company decided to go national, it opened franchises in locations guaranteed to generate buzz — Manhattan, Los Angeles, Las Vegas — and customers lined up around the block. By August 2003, KKD was trading at nearly $50 on the New York Stock Exchange, up 235 percent from its initial public offering price of $21 on Nasdaq, and Fortune magazine was calling Krispy Kreme the "hottest brand in the land." For the fiscal year ended in February 2004, the company reported $665.6 million in sales and $94.7 million in operating profit from its nearly 400 locations, including stores in Australia, Canada, and South Korea.

And then, just as rapidly as its popularity spiked, Krispy Kreme pitched into a steep downward spiral that may yet end in bankruptcy. The company's woes surfaced in May 2004, when then-CEO Scott Livengood blamed low-carbohydrate diet trends for Krispy Kreme's first-ever missed quarter and first loss as a public company. That raised analysts' eyebrows, as blaming the Atkins diet for disappointing earnings carried a whiff of desperation.
The Securities and Exchange Commission came knocking in July 2004, making an informal inquiry into Krispy Kreme's buybacks of several franchises. As the stock price plunged, shareholders filed suit. Franchisees alleged channel stuffing, claiming that some stores were getting twice their regular shipments in the final weeks of a quarter so that headquarters could make its numbers. The SEC upgraded its inquiry to "formal" status in October 2004. Average weekly sales, a key retailing measure, fell even as the company continued to add stores. In January 2005, Krispy Kreme decided to restate its financials for much of fiscal 2004. Livengood was replaced as CEO by turnaround specialist Stephen Cooper, who also kept his other job: interim CEO of Enron Corp.
The following month, the company announced that the United States Attorney's Office of the Southern District of New York was also joining the fray — a move indicating concern about possible criminal misconduct. In April, Cooper shored up the business by securing $225 million in new financing. The company announced that it expected a loss for its latest quarter, and warned investors not to rely on its published financials for fiscal 2001, 2002, and 2003, and the first three quarters of fiscal 2005, in addition to those for 2004. By early May, Krispy Kreme still hadn't filed its restated financials, and its shares were trading around $6.

What went wrong? How could a company in business for nearly 70 years, with an almost legendary product and a loyal customer base, fall from grace so quickly? The story of Krispy Kreme's troubles is, at bottom, a case study of how not to grow a franchise. According to one count, there are at least 2,300 franchised businesses in the United States, and many are extremely successful. But there are pitfalls in the franchise model, and Krispy Kreme — through a combination of ambition, greed, and inexperience — managed to stumble into most of them.

Aggressive Growth From its humble beginnings in 1937 as a family-owned business, Krispy Kreme slowly enlarged its footprint in the Southeast. In 1976, three years after founder Vernon Rudolph died, the company was sold to Beatrice Foods Co.; in 1982, a group of franchisees bought it back. In 1996, the company began to stake its claim as a national franchise.

But once Krispy Kreme went public, "there was enormous pressure, as there is for all companies, to grow very quickly and sustain growth quarter after quarter after quarter," comments Steven P. Clark, an assistant professor of finance at Belk College of Business at the University of North Carolina at Charlotte. Unfortunately, adds Clark, "this was not the sort of business that was going to have that kind of unending growth."

McDonald's Corp. is the gold standard in franchising, driving such profitability to individual restaurants that franchisees are eager to join the system and follow the company's stringent operating guidelines. But Krispy Kreme concentrated on growing revenues and profits at the parent-company level, while its outlets struggled. "You can often get a system to grow really large even when particular outlets aren't really profitable," notes Scott Shane, SBC Professor of Economics at Case Western Reserve University's Weatherhead School of Management and an expert on franchising. Franchises, he explains, suffer from "goal conflict": while the franchisor aims to maximize sales, and thus boost royalty payments, the franchisee needs to maximize profits. If a franchisor packs a market with outlets to boost its own growth, it hurts the system in the long run by forcing units to compete with one another.

"You might add another outlet in a market and increase your sales by 50 percent, but you might have turned franchisees in that market from profitable to unprofitable," says Shane. Thus Krispy Kreme reported nearly a 15 percent increase in second-quarter revenues from fiscal 2003 to fiscal 2004, but same-store sales were up just a tenth of a percent during that time. The waning of a fad? Perhaps. But citing the issue of "significantly declining new unit returns" in August 2004, J.P. Morgan analyst John Ivankoe wrote: "These returns declined as [the] incremental appeal of each new retail store fell upon market penetration." A year earlier, Ivankoe had downgraded the stock from "neutral" to "underweight," the equivalent of a "sell" rating.

Getting Greedy? Having to share markets with other outlets isn't the only handicap for franchisees. In addition to the standard franchise fee and royalty payments, Krispy Kreme requires franchisees to buy equipment and ingredients from headquarters at marked-up prices. This strategy, while not unheard of, can hurt franchisees in the long run.

"There are a couple of ways that franchise companies can look at the selling of equipment and formula," says Steve Hockett, president of FranChoice Inc., a company that matches potential franchisees with franchisors. "One is that it's a true profit center, even to the point where companies can be aggressive on pricing. But most successful franchise companies build their business around the royalty payment; they don't build it around equipment sales." Over time, says Hockett, "the franchisor is more likely to succeed by building profitable franchisees that can make royalty payments."

Giant Krispy Kreme competitor Dunkin' Donuts, for example, doesn't "generally sell equipment or product to [its] franchisees," says Kate Lavelle, CFO of the 6,400-store chain. "We have a strong royalty stream that is based solely on store sales." This model, says Lavelle, "keeps company and franchisee interests aligned."

Krispy Kreme, on the other hand, raked in $152.7 million — 31 percent of sales in 2003 — through its Krispy Kreme Manufacturing and Distribution (KKM&D) division, which sells the required mix and doughnut-making equipment. With initial equipment packages selling for $400,000, KKM&D can have operating margins of 20 percent or greater. But what's good for the franchisor's bottom line isn't necessarily good for the franchisee's. "[Raw ingredients and equipment] are sold to franchisees at what [is] an exceptionally high margin.... It is difficult to say how much this margin needs to drop to support franchise operations, but it must," wrote Ivankoe in an August 2004 report.

The Thrill Is Gone In its quest for growth, Krispy Kreme also squandered some of its mystique. "They became ubiquitous," says Jonathan Waite, an analyst for KeyBanc Capital Markets in Los Angeles. "Not just in sheer numbers of restaurant units, but also roughly half of their sales started going to grocery stores, gas stations, kiosks. Anywhere that consumers could be found, you could find a Krispy Kreme."

In what amounted to an act of heresy to Krispy Kreme devotees, the company also added smaller "satellite" stores that didn't actually make doughnuts. Unlike its factory-style franchises where customers could watch as the pastries were showered in glaze — "doughnut-making theater," the company called it — some new stores offered doughnuts that had been made elsewhere. Other products were added to the menu, too, including a line of high-carb, high-calorie frozen drinks, or "drinkable doughnuts," as people dubbed them.

Straying further from the appeal of its key product, in May 2004 the company announced that it was developing, of all things, a sugar-free doughnut, in response to the popularity of low-carb diets. (The sugarless doughnut has yet to be rolled out, however, and the new management team is reviewing the concept.)

Fudging the Numbers As Krispy Kreme pursued its ambitious growth strategy, it was making missteps in the finance department as well.

Except for the company's plan to finance a $35 million mixing plant in Illinois with an off-balance-sheet synthetic lease — a plan the company scuttled in February 2002, in the face of post-Enron suspicions — Krispy Kreme's accounting seemed unremarkable until October 2003. That's when the company reacquired a seven-store franchise in Michigan, called Dough-Re-Mi Co., for $32.1 million. The company booked most of the purchase price as an intangible asset called "reacquired franchise rights," which it did not amortize, contrary to common industry practice. Krispy Kreme had also agreed to boost its price for Dough-Re-Mi so that the struggling franchise could pay interest owed to the doughnut maker for past-due loans. The company then recorded the subsequent interest payment as income.

Krispy Kreme also rolled into the price the costs of closing stores and compensating the operating manager and principal owner of the Michigan franchise to stay on as a consultant. Both of these expenses became part of the intangible "reacquired franchise rights" asset on the company's balance sheet, rather than costs that would have reduced the company's reported earnings. Krispy Kreme announced in a December 2004 8-K filing that it will need to make a pretax adjustment of between $3.4 million and $4.8 million to properly record the compensation as an expense. A second adjustment of some $500,000 will reverse the improper recording of interest income.

Krispy Kreme's repurchase of its northern California stores from a group of investors is also under scrutiny. In February 2004, the company paid $16.8 million to buy the 33 percent of Golden Gate Doughnuts LLC it did not already own. One of the beneficiaries of the buyout was the ex-wife of CEO Scott Livengood. The company failed to disclose this fact, although Adrienne Livengood's stake was valued at approximately $1.5 million. While the decision not to reveal the connection looks bad, "this is only a significant legal issue if it somehow could be established that [Livengood] was seeking some kind of personal profit or gain through his ex-wife, as opposed to truly serving the company's interest," says Carl Metzger, a partner with Goodwin Procter LLP in Boston.

In its December 8-K, Krispy Kreme revealed that there would need to be adjustments made to the accounting for the Golden Gate Doughnuts purchase as well — a total of $3.5 million to correct improperly recorded compensation expenses and management fees that had been included in the purchase price. The company will also make a similar correction to fix errors made in the acquisition of a franchise in Charlottesville, Virginia.

On top of the questionable accounting and the lack of disclosure, Krispy Kreme may have paid inflated prices for some of the franchises it bought back. In 2003, the company spent $67 million to repurchase six stores in Dallas and rights to stores in Shreveport, Louisiana, that were owned in part by former Krispy Kreme board member and chairman and CEO Joseph A. McAleer Jr. Another longtime director, Steven D. Smith, was also part owner. Compared with the $32.1 million paid for the Michigan stores that same year, the number sounds high — $11.2 million versus $4.6 million per store. A civil suit filed by another former franchisee alleges that a higher bid was offered but ignored.

"I asked a lot of questions about why they paid so much for those acquisitions," says one analyst. "I don't think I ever truly got an answer. They told me it was a different time in terms of valuation, but those were pretty exorbitant prices." The SEC, presumably, will insist on an answer in the course of its investigation.
Who Minded the Store? The company's own investigation, as detailed in an April notification to the SEC, has turned up accounting problems in other areas, too, involving derivatives, leases, equipment sales, and the consolidation of a bankrupt subsidiary. Even if these turn out to be mostly peccadilloes, they raise a question: Who was minding the store in the finance department?

As it turns out, a lot of people. From 2000 to 2004, Krispy Kreme employed three different CFOs. John Tate joined just after the company went public, in October 2000, after 18 months at kitchenware retailer Williams-Sonoma Inc. Tate was promoted to chief operating officer in 2002, and Randy Casstevens, the company's longtime controller, took the top finance spot. Casstevens, who had spent most of his career at Krispy Kreme, had never been CFO of a public company before. After adding the chief governance officer role to his duties, Casstevens left in December 2003 in a move he then called "purely voluntary," just five months before the company announced its first earnings miss. (Now working as a career counselor at Wake Forest University in Winston-Salem, Casstevens declined to be interviewed for this story.)

To replace Casstevens, Krispy Kreme brought in current finance chief Michael Phalen, who had worked with Krispy Kreme as an investment banker for CIBC World Markets and Deutsche Banc Alex. Brown, but had never held a CFO post before. The company declined to make Phalen available for an interview. John Tate, meanwhile, departed in August 2004, and is now the operations head at Restoration Hardware, working once again with his former boss from Williams-Sonoma. Tate did not return phone calls for comment.

Company watchers come to different conclusions about the meaning of the CFO churn. Ric Marshall, chief analyst at governance watchdog The Corporate Library, says the turnover may mean the CFOs were trying to raise red flags about the company's financial state. "To me, this says the real numbers the CFOs were coming up with were numbers that the rest of management didn't want to hear. They were looking for a CFO who was going to tell them good news." Adds Goodwin Procter's Metzger, "It may be that a particular CFO is the one who brought these issues to the company's attention. You just don't know." But the fact that Tate and Casstevens were both promoted before leaving indicates that they were on good terms with the board and their fellow managers. All three CFOs answered to Livengood, whose 27 years at the company gave him far greater tenure than any of the finance chiefs.

Stephen Mader, vice chairman of executive recruiter Christian & Timbers, says the CFOs simply may not have been up to the task of guiding a high-growth franchise through the public markets. "This happens a lot with companies that enter the public arena that had done well under earlier conditions, but don't have the experience in the public markets," he says. "You could simply have nothing more here than a lot of marginal competence for running a company of that magnitude."

Current finance chief Phalen "is a capable guy," comments Waite. "If you look at his compensation structure, it's mainly stock options. He has incentive to get the ship righted." But Mader is less optimistic about the CFO's chances. "It's very rare to take a company into bankruptcy or a turnaround phase and hold on to the existing CFO to do it," he says. "You need someone with no baggage, no sacred cows, who can look at things with objectivity."

A Missing Ingredient When Krispy Kreme was a fast-growing private company, it was easy to conceal weaknesses in management and corporate governance. But those weaknesses were magnified by the pressures of the public markets, particularly when the company's growth strategy started to stumble, says Marshall. "When you don't have a fully independent board holding management responsible for operational and strategic shortcomings, a machine moving that quickly is going to fall apart," he says. "They really weren't able to sustain the growth rate."

Until recently, Krispy Kreme's board was stocked with insiders left over from the company's days as a private business, including some, like McAleer and Smith, who owned franchises. And until early 2002, the company maintained a fund through which 35 executives could invest in franchisees, potentially creating conflicts of interest. Management elected to dissolve the fund as part of a push to improve governance.

In another questionable move, in 2003, Krispy Kreme purchased Montana Mills Bread Co., a bakery-café chain at which Tate, then chief operating officer, was a director. Tate has said he was not involved in discussions about the transaction. Krispy Kreme put Montana Mills up for sale a year later, after paying approximately $40 million in stock for the business and then recording a $34 million charge upon closing most Montana Mills stores. Together with the problematic franchise buybacks, the transaction smacks more of an insider deal than simple incompetence.

A further warning sign of weak governance was the outsized compensation package awarded to former CEO Livengood, says Marshall. Livengood's total compensation was more than 20 percent greater than the median for similar-size companies, according to The Corporate Library. Despite the company's decline, Krispy Kreme's board allowed Livengood to retire with a six-month consulting position that will pay him $275,000. He holds $1.7 million in options in addition to nearly 100,000 shares of Krispy Kreme stock. Livengood also continues to receive health benefits through the company, but he will no longer have use of the company jet, since one of new CEO Cooper's first moves was to sell off the aircraft lease.

"When we see patterns of excessive compensation, that is usually an indicator that the board is not sufficiently independent," says Marshall. As a result of the board's coziness, he says, no one stepped in to challenge Krispy Kreme's move away from the fresh-doughnut model, and no one questioned the aggressive accounting for franchise buybacks. "It was a classic governance failure," sums up Marshall.

A Fresh Start Although Krispy Kreme today looks like a company becalmed, if not sinking, some observers believe it will regain momentum. "Krispy Kreme as a company still has a lot of value in its name and in its product," says attorney Metzger. "There should be a way for the company to continue to grow the business."

With the January 2005 replacement of Livengood with Cooper, the revamped board — in which 8 of 10 directors are fully independent, according to The Corporate Library — has shown it is serious about making a turnaround. Since his arrival, Cooper has lined up $225 million in new debt financing led by Credit Suisse First Boston, Silver Point Finance, and Wells Fargo Foothill Inc. to help Krispy Kreme meet its immediate cash-flow needs. Cooper also announced a cost-cutting program that includes a 25 percent reduction in head count.

UNC's Clark suggests the company may need to go private or sell itself to another large chain, like McDonald's. "But I'm not sure that buyers are exactly lining up at the door," he adds. KeyBanc's Waite calls an acquisition doubtful, in part because he says the company is "not terribly cheap," given the amount of work needed to get it back on track. Indeed, Waite hasn't ruled out the possibility of bankruptcy. "The biggest thing they have to do is bring on an operator," he says. "They need an industry insider who can stem the drop in sales at the unit level — somebody who knows how to drive organic sales growth."

Ultimately, Krispy Kreme needs to get back to what fueled its phenomenal growth in the first place: really good doughnuts. "They need to emphasize the hot-doughnut experience," says Waite, "rather than the cold, old doughnut in a gas station."

Kate O'Sullivan is a staff writer at CFO.