NEW YORK — Struggling to pull itself out of Chapter 11 and prop up its sagging business, The Leslie Fay Cos. is about to implement two major moves — dropping domestic production and selling its flagship brand to J.C. Penney.
Although retailers declined to discuss the matter, both steps are regarded by manufacturers and industry analysts as smart choices — but not without risk.
Leslie Fay’s decision to close its manufacturing facility in Wilkes-Barre, Pa., announced last month as the opening salvo in talks with the ILGWU on a new three-year contract, is being greeted as a tough tactic, but one that could help the apparel maker regain its footing and allow it to become more competitive in the moderate-to-better-price dress and sportswear market.
The ramifications of selling to Penney’s, however, could be less sanguine for the 47-year-old company, testing the loyalties of longtime accounts as well as the potency of the brand for mainstream department store retailing.
Leslie Fay and Penney’s acknowledged in March that they were in talks about distribution. Late Friday, Leslie Fay confirmed that it will start selling the retailer the Leslie Fay brand in dresses and sportswear with the fall collections.
Kathryn Connors, Leslie Fay’s senior vice president for corporate affairs, said the move to sell to Penney’s was an outgrowth of a study done by Walter Levy Associates, which concluded that 87 percent of consumers felt that Penney’s was a major department store.
“J.C. Penney felt our product was a good fit for their customer and merchandising, and we’re looking forward to a productive partnership,” Connors said. “Everybody knows the label is strong, and as long as it’s retailing well — and it is right now — we don’t think we’ll have much negative reaction from other department stores.”
Jim Hailey, president of the women’s division at Penney’s, said the chain will stock a broad assortment of Leslie Fay dresses and sportswear this fall in misses’, petite and large sizes in about 500 larger stores nationwide. It also will be sold in the catalog, but that merchandise may break later than the fall due to the long lead time in catalog merchandising.
“We feel the customer wants the product and our research indicates tremendous brand recognition,” Hailey said. “We’ve had some initial spring merchandise in about 30 stores in order to get procedures down and work out the bugs, and the sell-through has been exceptional,” he noted. “We have had stores trying to reorder because they sold virtually all of it.”
He declined to project how much business Penney’s expects to do with the brand, saying only, “We will let the customer decide how much business we do, and we will offer all that we have demand for.”
Leslie Fay’s decision to sell Penney’s comes after several years of lobbying by the retailer.
“This is certainly one of our desirable labels that we have been trying to get in years past,” said Hailey.
Manufacturing executives and industry analysts feel Leslie Fay’s decision to start selling its signature brand at Penney’s is a controversial but shrewd move that shows the company has been analyzing its business and is looking to shore up its position in the market.
“J.C. Penney doesn’t carry the stigma that it used to carry,” said one industry source close to Leslie Fay. “Everybody in the moderate market is there, and other department stores aren’t holding it against vendors any more if they’re carried in Penney’s, as long as your goods perform. They’ve really changed their image from a mass chain to a moderate department store. Who could afford to turn down their business? Their orders are huge.”
Some observers, however, counter that Penney’s growing encroachment on the moderate business is just what rankles other department store executives, and decisions to sell to Penney’s have been troublesome — if not costly — for some brands.
In March, May Department Stores Co. dropped Revlon’s Ultima II brand from its shelves, followed last month by Federated Department Stores’ similar stance, with each chain saying the brand was too widely distributed, without specifically citing Penney’s.
Only last year did R.H. Macy renew its relationship with Levi Strauss after an 11-year separation. Macy’s dropped Levi’s in 1982 after the vendor began selling to Penney’s and Sears, Roebuck.
According to Leslie Fay’s 1993 annual report, Dillard’s Department Stores accounted for 14 percent of overall sales, with no other customer accounting for as much as 10 percent.
Calls to William Dillard 2nd, president of Dillard Department Stores, as well as to company spokesmen were not answered. The Dillard president and John Pomerantz, chairman of Leslie Fay, have long been close associates, however, and some sources have suggested that if Dillard’s drops the Leslie Fay lines because of the Penney’s move, Dillard’s might pick up the slack in private label business with the supplier.
A corporate spokeswoman for Macy’s answered with “no comment” when asked for reaction to the development, and calls to several other top retailers — including May Co. and Federated — drew no responses.
Other manufacturers, though, pinpointed the risks in selling to Penney’s but also said it might not be a bad move for Leslie Fay at this time.
Morris Marmalstein, president of the Warren Group, said the decision to sell to chains such as J.C. Penney remains a tough one for any moderate firm to make because many department stores will not carry a line if it’s sold in the chains.
“My thinking is that for the sake of a quick order of 5,000 dresses, it’s not worth the risk,” Marmalstein said. “But they have a bigger engine to drive than we do, so we can approach things differently. They are more concerned about maintaining volume in a tough market, and for Leslie Fay, it might be the right way to go.”
Bud Konheim, president of Nicole Miller Ltd., said the moderate business in department stores in recent years has so dwindled — particularly with the emergence and availability of better and bridge secondary labels with a strong following — that many moderate makers are looking for new channels of distribution, such as Penney’s and other chains.
“It’s a better way to address the future of the company,” Konheim said. “The orders are all programmed and prepared in advance. It’s partly the circumstances they are under that has determined this kind of strategy, but everybody is looking for new ways of selling. For us, our boutiques have proven a successful way of branching out.”
One manufacturer, a maker of private label merchandise for Penney’s who requested anonymity, said the store has improved its merchandising and image to the point that it is now considered a moderate department store that carries quality merchandise.
“I think there is a realization that the shine has gone off the Leslie Fay name, and Penney’s is an anxious suitor, so it’s a prudent move on their part,” the manufacturer said.
Analyst Todd Slater, with UBS Securities, had this view: “The Leslie Fay dress business — which currently can’t get arrested — still has a lot of potential. The brand has a terrific amount of consumer recognition. People age 35 to 50 are the fastest-growing segment of the population, and Leslie Fay has always been geared toward a mature woman.
“Under the right focus — and J.C. Penney could help provide the new focus they need to succeed — there is a huge opportunity for the dresses to be a major brand once again.”
Slater said that while some department stores may balk at buying the line if it’s in Penney’s, he feels most will stick with the label because there isn’t much competition in the “very fragmented” moderate dress market.
The manufacturing and financial communities are more in agreement that Leslie Fay’s move to shut down its domestic manufacturing is a good one.
The ILGWU, which has protested Leslie Fay’s actions in front of retailers’ front doors and at the firm’s showroom at 1400 Broadway here, says the company is abandoning its workers in favor of cheap foreign labor. Leslie Fay executives say they are just struggling to survive against stiff competition and overcome the problems created by the last year’s accounting scandal and subsequent Chapter 11 filing, as reported profits had to be refigured and restated as losses.
After restatement, Leslie Fay reported a loss of $65.6 million on sales of $772.1 million in 1992. For 1993, the firm reported a loss of $95.2 million on sales of $661.8 million.
Donald Ochs, senior vice president of global manufacturing and sourcing at Leslie Fay, said “manufacturing dresses at the Pennsylvania facility became an unprofitable experience.”
“A great deal of the fraud that led to this company’s Chapter 11 came from improper recording of the costs of production,” Ochs commented. “If we continued to make dresses there, we were faced with having no profit margins on the dresses.”
Ochs said the decision to discontinue domestic production was not an easy one, and reiterated the company’s intentions to participate in funding worker retraining programs.
Ochs also said there will always be a portion of production that must be made in a Quick Response mode, but he feels that can be achieved through 807 production, most notably in the Dominican Republic, Honduras and El Salvador. In addition, Ochs said, Leslie Fay is doing some 807 production in Guatemala and along the border with Mexico, and it is importing from the Far East.
He also refuted claims made by the union that Leslie Fay’s Guatemala production was under sweatshop conditions.
“The factories we use in Guatemala are being used by many other large apparel firms, and we are very cautious about health and safety issues,” Ochs said.
Jay Mazur, president of the ILGWU, said Leslie Fay cannot survive without some domestic production. He said the company’s decision to close its U.S. factory is “bad business judgment, bad for the workers and bad for America.”
Mazur said it’s not the union’s position that Leslie Fay shouldn’t import at all — it currently brings in about 72 percent of its sales from abroad. He said the concern is that Leslie Fay is looking to bust the union and “divert attention away from their financial troubles.”
“We think their decision is suicidal,” Mazur said. “We’re in for a major confrontation based on their current position.”
Marmalstein said he understands Leslie Fay’s decision to close its U.S. production in favor of imports.
“The way things are today, with price being so important, even if you don’t want to go that route, you have to in order to compete,” he said.
Nicole Miller’s Konheim said that when it comes to the fight between Leslie Fay and the ILGWU, “I’m on Leslie Fay’s side.”
“They’re looking to save the business and save jobs,” said Konheim, who uses only union contractors. “The union should work with them. Leslie Fay has been the pillar of the industry and the standard bearer in bargaining with the unions, so it’s silly to think they are anti-union.”
Konheim said going offshore does have its advantages, specifically lower labor and overhead costs, although he chooses to keep Nicole Miller’s production here because of the quick-turn, fast-fashion nature of its business. However, he said, Leslie Fay has years of experience in domestic production and importing.
“I would think they’ve thought this out, and they don’t see Leslie Fay as a business where quick turn matters,” Konheim said. “It should be a good move for them. It shows they are getting aggressive and doing something to reshape their business.”
One industry analyst, speaking on condition of anonymity, said Leslie Fay has been forced to make decisions it might not have made if it wasn’t in Chapter 11, but that these moves could prove to have long-turn benefits.
“It’s been proven in the apparel industry that you don’t need expensive domestic production if you can produce it offshore for the same quality and with timely delivery,” the analyst said. “The Kasper division makes all the money in that company and does all its sourcing offshore. Maybe they are learning and taking a few lessons from Arthur Levine.”
Levine is the chairman of the Kasper for ASL division of Leslie Fay, the largest segment of the business with a volume of about $350 million.
One industry source, a longtime unionized producer, said that “it’s a smart move” for Leslie Fay to look to close its domestic plants, and “any unionized manufacturer would agree.”
“There is an opportunity for them — because they are in reorganization — to get out of their contract and move their labor force overseas,” the manufacturer said. “There is no future in unionized manufacturing in this country because it’s just too expensive and the union is too demanding.”
Marie Beninati, director of retail marketing strategy for Kurt Salmon Associates, said: “Leslie Fay has gotten their act together. I’ve been very impressed at some of the people they’ve brought into the company. They’ve had an unfortunate setback, but they’re poised to overcome it.”
Beninati said while she and Kurt Salmon “believe in building U.S. manufacturing and supporting it,” sometimes economics dictate producing offshore. Beninati added that although Quick Response is best achieved with domestic production, it can be done with imports as well, notably in nearby Caribbean Basin and Central American 807 countries.
“These are smart moves for them,” said Edward F. Johnson, director of Johnson Redbook Services, referring to both Leslie Fay moves. “Manufacturers like Liz Claiborne manufacture just abroad and have saved money that way and have been successful. As for selling J.C. Penney, more and more are doing it.”