Continuing the series on a turnaround of Corporate entities, we will discuss and analyze the factors resulting in deterioration of the economic condition of R.G. Barry Corp., a faltering shoe making Company in the US, and a role of turnaround specialists in staging its dramatic turnaround.

Things were not looking good for R.G. Barry Corp (‘Barry’). The $125 million company in Pickerington, Ohio, has been making Dearfoams slippers -sold mostly in department stores like J.C. Penney, Sears, and Wal-Mart -since 1947. With the son of a founder presiding as chairman for 40 years, the company peaked in the mid-’90s with sales of $150 million and its stock price at $25. By mid-2003, Barry had lost $20 million, sales were plummeting, its stock was at $2.08, and it was in default on a $10 million loan from its longtime lender, Huntington National Bank of Columbus, Ohio. The Dearfoams maker was out of both money and time. The bank ordered, Get a turnaround artist-fast.

Meridian Group president Maggie Good and her partner Tom Von Lehman were hired as consultants in January 2004. Good, with a background in restructuring small to midsize companies, works with lenders to buy a company time and cash. Then Von Lehman steps in as interim manager while the company’s still on life support.

At that time, the bank wanted two things: another lender and a plan to make Barry profitable within the year. Good and the bankers traveled to Mexico to tour the company’s factories and warehouses. They were aghast to see three plants running full throttle in January while the warehouses were bursting with 12 million pairs of slippers. Whoops. Asked to explain, the operations manager declared that inventory was not his responsibility. The bank called in the loan, giving the company five weeks to pay.

Good and Von Lehman now had that much time to come up with a plan to save the company and persuade a lender to advance $1 million a week to keep it afloat. The plan they presented to the board was radical. They proposed changing where the product was made, where it was stored and who it was sold to. Among the changes:

  • transfer manufacturing and storage from Mexico to lower-cost China,
  • update marketing,
  • reduce the number of styles and customers, and
  • dump millions of outdated inventory.
  • In addition, the team recommended consolidating company functions in Columbus by replacing the New York City sales office with a showroom and shuttering the San Antonio operations center.
  • The plan also called for eliminating swaths of management, including 13 of 23 vice presidents.

The CEO balked, but the board backed its leader and asked Von Lehman to become interim CEO. With Von Lehman installed, the bank agreed to extend the loan to the end of March. That still didn’t leave Good much time. She desired to find a lender with a lot to gain. That meant either a high-risk lender at 16% to 17% or a lender who would get more than interest. By the end of March, she had finalized a short-term factoring deal with CIT, agreeing to pay 200 basis points above prime and 0.75% of Barry’s receivables.

Von Lehman’s next problem was to keep the Mexican plants running through May to produce the goods for Christmas but at the same time plan to shut them down. But workers got suspicious when the company stopped ordering raw materials. They had seen other U.S. companies close overnight without paying the legally mandated severance pay. Two days before the planned but unannounced shutdown, workers at one plant took the American manager hostage, locking her in the lunchroom until they were assured of severance. The next day Von Lehman sent a pile of cash in an armored truck. Amazingly, the employees showed up for work their last two days.

Barry also had a warehouse it needed to keep operational for two months in order to supply major clients at Christmas. These workers staged a walkout, refusing to ship until the company posted a bond for their severance. Had Barry not supplied to their core customers that year, they were toast. The company posted the bond with a Mexican lawyer, who scammed half the money. Another truckload of cash had to be sent.

As Von Lehman managed the company through mid-2006, its condition was gradually upgraded. In June 2004 it was kicked off the New York Stock Exchange, but it broke even on an operating basis and began 2005 with zero debt, having paid off the loan from CIT. By December, the company’s stock was listed on the American Stock Exchange. Using exclusively Chinese manufacturing, Barry raised profit margins and completed the turnaround without losing core customers -most important, Wal-Mart. In 2005, the company made $8 million. By the time Von Lehman left in May 2006, the stock was trading in the $6.50-$7 range, up from its low of $1.40 in early 2004. In its latest quarter, sales increased 12%, as a revamped line of products has gained momentum. The company has even made an acquisition, buying the NCAA College Clogs business from another shoemaker, Wolverine World Wide Inc.

(Source: Time.com)

Turnaround Specialists

Some of the key points to be noted from the above turnaround story:

  1. Radical change in thought process is need of the hour:When the turnaround specialists suggested changes such as shifting of the manufacturing base, dumping of outdated inventory and sacking of surplus manpower, CEO of Barry resisted. This was because he was not flexible enough to think of and instigate such radical changes. In resisting the changes, he may have lost sight that the prevalent mode of functioning had culminated in piling up the losses resulting in a disastrous economic condition of Barry. Had he been flexible in his thought process and adopted a radical approach, he would have formulated the turnaround strategy on his own.
  2. Continuous analysis of the cost factors and evaluation of options:One mistake which many Companies are prone to make is to expect business factors to remain constant throughout the growth of the Company. In this era of globalization and dynamism, Companies need to constantly analyze the various cost factors and be on the lookout for opportune moments to reduce the costs. Barry failed to do just that! A feasibility analysis of the cost of production in Mexico vis-à-vis countries where the cost of production is low, such as China, India would have clearly indicated the long-term benefit of shifting production base to these countries rather than continuing production from Mexico.
  3. Hedging against raw material price fluctuations:If a Company enters into a long-term supply contract for its finished goods with the customers, it will be foolish on its part not to enter into a similar contract for securing raw material supplies at a pre-determined price. This will act as a natural hedge against any dramatic price fluctuations which the Management would not have factored in the long term price commitment to their customers. Management should make all efforts to hedge the Company from fluctuations in raw material prices. For e.g. Entering in long-term contracts, backward integration, avoiding over-dependence on few vendors, etc
  4. Making informed decisions:Information and MIS systems should be upgraded to a level where Management can cull out any information pertaining to the factors impacting the profitability of the Company. This will help Management in determining the optimal product mix, the sensitivity of a particular factor to the profitability, diversification to de-risk the business model, etc.
  5. Expanding just for the sake of it:Many companies fall trip to the ‘growth at any cost’ syndrome. In this process, they acquire companies by creating highly leverage position and without conducting a thorough due diligence review. They open up new stores, warehouses, marketing offices and are then unable to sustain the additional costs. The result is a body with too many unwanted parts attached to it. This eventually brings down the entire body.

Role of turnaround specialists

Developed countries have various organizations dedicated to corporate renewal and turnaround management. These organizations train professionals to develop and hone skills for helping troubled companies in the recovery process. Turnaround specialists have helped many companies in kick-starting the recovery process and guiding these troubled companies during the recovery phase. Turnaround specialists carry out one or more of the following tasks:

  • Assume strategic positions in the Management of the business
  • Discussion with leaders to a) not freeze the existing credit facilities and b) extend credit facilities. As lenders are wary of the old management, lenders favor extending loans to such companies who have inducted turnaround specialists in the Management
  • Preparation and implementation of the resolution plan for bringing about a turnaround in the Company’s fortunes.
  • Negotiate with the laborers for wage cuts or reduction in the pension liabilities. Laborers are prone to negotiate with a specialist willing to turnaround the Company, rather than the Management, who they feel are responsible for the downfall of the Company in first place.
  • Make tough decision to discontinue operations of some plants and close warehouses. Taking tough decisions can sometimes be tough for regular management, as they have built and groomed the company for so many years.
  • Bring a fresh perspective to the thought process of the Management.

Conclusion:

As they say, Rome was not built in a day! Similarly, a Company cannot crash in a day. It’s a gradual process and is imperative for the Management to stop the run at an early stage. They should constantly review the financial performance of the Company and should be flexible enough to adopt dynamic changes.

Management of faltering companies should consider seeking the advice of turnaround professionals and even induct them on Board. With recession setting in, it is high time that Government and professional bodies recognize the need for turnaround specialists in India and should actively encourage establishing a body to train and certify such specialists. This will go a long way in facilitating quick turnarounds and less pain for the stakeholders.

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1 Comments

  1. mark bates says:

    Excellent white paper article. With a clear focus on shareholder value early on – the company would have been able to maintain a solid trajectory instead of languishing in it’s own glory. We see this many times also http://theturnaroundmindset.com

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