By  on March 18, 2010

Arbonne International LLC chief executive officer Kay Napier wants the direct-sales skin care and cosmetics company’s journey into and out of bankruptcy to be a success story worthy of a Harvard Business School case study.

The case study could begin with Napier being named ceo in August after a yearlong interim ceo stint by restructuring specialist Stan Springel. She was promptly handed a tough dual challenge: ingratiate herself to a field of independent consultants constituting the backbone of Arbonne’s business — although never having been in direct sales — and simultaneously be the bearer of bad news about an upcoming bankruptcy.

“This would be the mother of all p.r. crises I would have to deal with, so I thought of it as an opportunity,” said Napier, who spent 23 years at Procter & Gamble and almost four at McDonald’s prior to joining Irvine, Calif.-based Arbonne. “We started this whole process of transparency.”

Transparency meant a lot of talking. Napier phoned Arbonne’s top consultants to warn them of the storm approaching. In person, she addressed the concerns of Arbonne’s national vice presidents, a group of high-volume consultants, during an open-ended question-and-answer session held at a Maui retreat in January.

Napier’s message was simple: Arbonne wasn’t going anywhere, but it would become a healthier operation by cutting its debt. “This is going to be really good for the business.…I am going to keep you informed,” Napier told consultants about the bankruptcy. “Then, the consultants made their own judgment.”

On Jan. 27, Natural Products Group LLC, the corporate umbrella encompassing Arbonne, natural personal care brand Nature’s Gate, and Levlad LLC, manufacturer for Arbonne and Nature’s Gate, filed for Chapter 11 protection in Delaware. NPG headed to court with a prepackaged plan to reduce its massive debt — it had $804 million of total liabilities on total assets of $286 million — by more than 80 percent.

Before debt strangled progress, Arbonne showed promise. Private equity firm Harvest Partners, along with additional investors, spent $93 million to acquire NPG in 2004, when it rang up $200 million in sales, and Arbonne recorded immediate growth following the acquisition. Court documents reveal the number of independent consultants increased from 434,000 to 612,000 in 2005 to 2006. But Arbonne reversed course in 2007, 2008 and 2009, losing 108,000, 270,000 and 145,000 consultants in those years, respectively. Those that did stay with Arbonne — almost 800,000 were estimated to be active in 2009 — were part of a direct-sales culture that didn’t prioritize moneymaking.

Despite its problems, Arbonne generated positive earnings before interest, taxes, depreciation and amortization of $38 million and revenue of $378 million in the year ending Nov. 30. And Napier remained convinced Arbonne’s fundamentals — its position in direct sales, its research and development and its consultant base — were strong.

On Feb. 22, the court approved the reorganization plan, and NPG emerged from Chapter 11 on March 5. A mix of financial institutions, investment firms and banks now own NPG, with no single owner having a controlling stake. Harvest Partners is out of the picture.

Through the bankruptcy, Arbonne experienced modest fallout. Competitors posted blog items and YouTube videos about Arbonne, presumably to get Arbonne consultants to switch allegiances. In a recent conference call, Truman Hunt, ceo and president of direct-sales company Nu Skin, described a “feeding frenzy” when a company such as Arbonne flounders, but he praised Arbonne’s management as “impressive” and predicted the company would survive.

Tiffany Buxton, an Arbonne executive national vice president, said she had been contacted by someone trying to poach her from Arbonne. She stuck with Arbonne, and noted she hadn’t heard of other longtime consultants leaving. Buxton credited Napier’s efforts to reach out with easing the Chapter 11 ordeal. “I have been highly impressed with the level of communication,” she said.

Napier’s focus is turning to business post-bankruptcy. She said Arbonne, only available outside the U.S. in Canada, Australia and the U.K., could be a major force internationally. She also is gunning for a 50 percent jump in the number of consultants she dubbed “true business builders,” which currently make up 10 to 15 percent of Arbonne’s consultants, and looking to attract consultants from the burgeoning ranks of the under- and unemployed.

“The business today is just south of $400 million. I think it could and should be multiples of that,” said Napier.

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