NEW YORK — Leslie Fay dresses and Joan Leslie sportswear may soon see the light of day — but undoubtedly at reduced prices.
This story first appeared in the January 16, 2004 issue of WWD. Subscribe Today.
“We will be beginning to clear goods out of Customs at the end of this week and [the] beginning of next week,” said Rick Darling, president of Li & Fung U.S.A., sourcing agent for LF Brands. The spring merchandise, currently in Customs, on the water and in factories, has been in limbo since last month when LF Brands abruptly shut its doors without being able to pay or accept the goods.
“We are trying to fulfill orders between now and April where we can,” said Darling, adding that Li & Fung is trying to get a handle on those clients who still have interest in taking in spring merchandise. Between 80 and 100 containers of goods are in Customs and the port, ready to move through the pipeline over the next 10 days or so, he said. There’s merchandise on the water that hasn’t arrived yet, and will be arriving daily, he continued, as well as goods that are in the process of being shipped from overseas. Darling said Li + Fung has an agreement with LF Brands and its bank, CIT, to put the profits back into the company. “We’ve agreed not to take profits on it,” he said.
Sources have indicated that LF Brands and Three Cities Research, majority owner of LF Brands, are trying to get funding to pay former employees their back wages, but as of Thursday, that hadn’t happened. Nor has the company filed for Chapter 7 or Chapter 11. J. Richard Budd 3rd, chief restructuring officer of LF Brands, didn’t return a phone call seeking comment. His financial firm, Marotta Gund Budd & Dzera LLC, was retained last week. (Three Cities Research Inc. and Three Cities Holdings Ltd. are equity security holders in Factory 2-U Stores Inc., which filed for Chapter 11 bankruptcy court protection on Tuesday. Three Cities made a $30 million equity infusion when it operated under its former nameplate, Family Bargain.)
More than 200 union and nonunion employees in New York and Pennsylvania were impacted by LF Brands’ sudden closure.
David Melman, manager of the Pennsylvania, Ohio and South Jersey joint board of UNITE, told WWD Thursday that the 100 union employees who worked in the distribution center in Laflin, Pa., hadn’t received their back wages yet, but were told they would get them next week.
“People are outraged. Some worked for Leslie Fay for 30 years and got fired on Christmas without getting their last two weeks of pay. It’s outrageous,” said Melman. “Their health insurance ends at the end of January, they’re owed severance under their contracts and the company has not said they’re paying severance and COBRA. There are plenty of company officials who have made millions of dollars over the past 40 years,” he added.
He said he’s had two meetings with the employees so far, and has set up a meeting with the state agencies next week regarding unemployment, training and emergency state benefits. “It’s a disgrace how they treated these workers and that includes current management. We think John Pomerantz [LF Brands’ former chairman] should personally pay the severance if the company is unable to.”
Industry sources have attributed many of LF Brands’ problems to production delays caused by Li & Fung, which resulted in numerous department stores canceling orders and requesting markdown money. When CIT asked Li & Fung and Three Cities Research to put up more money last month, both refused, and CIT had to pull the plug. Li & Fung already had invested $5 million in the company last September.
Darling said he wasn’t aware of any production issues out of the ordinary. “We started this 18 months ago, and I’m sure there were some start-up problems. I haven’t heard of any quality or timing issues since the start of this relationship. Any time we take on a full sourcing program like this, there are hiccups in the relationship, but they’ve been long resolved.”
Meanwhile, debate continues to rage over the way LF Brands treated its employees. While many people characterized the actions as unconscionable and extremely unfortunate, several believe it’s a separate case and doesn’t reflect badly on the apparel business. Others, however, think it is a further reflection of the industry’s lack of professionalism.
“It’s an isolated situation totally based upon what has to have been bad business decisions for a long time,” said Arnold L. Cohen, chairman and co-founder of accounting firm Mahoney Cohen & Co. Inc., who also is Pomerantz’s personal accountant.
Historically, the garment center has been known for its rough-and-tumble, take-no-prisoners approach, but there are many companies that have made tremendous strides in bringing a greater sense of professionalism to the apparel business, said recruiters. Public apparel firms such as Liz Claiborne Inc., Jones Apparel Group, VF Corp., Sara Lee Corp., Kellwood Co., Nike Inc., Phillips-Van Heusen, Polo Ralph Lauren and Tommy Hilfiger Corp. have, to varying degrees, established solid reputations for offering comprehensive benefit packages, professional development programs and performance reviews.
To be sure, hundreds of smaller apparel companies have been known to shut down suddenly when they run out of resources and don’t have brand equity. But industry observers point out that, while LF Brands may be in a different league size-wise — with more than $100 million in sales and over 200 employees — and has been around since 1947, it hasn’t been smooth sailing. Over the past decade, the company has been rocked by an accounting scandal, bankruptcy, union troubles and several bad management decisions. In the past two years, the company lost a significant amount of money and was in a lot deeper trouble than people realized.
Elaine Hughes, president of E.A. Hughes, an executive recruitment firm here, doesn’t believe LF Brands’ behavior will have far-reaching implications. “Many people in the industry are used to the unprofessionalism,” she said.
“The apparel business is like being in Dodge City. There’s no law and order to it. Nobody’s watching it, with a few exceptions,” said Hughes. “Unless you get an enlightened chief executive officer or a president who knows how to integrate well, many companies are not run professionally,” she said. She explained that when Nautica was taken over by VF, the Nautica human resources executive made sure things were properly taken care of and all the benefits were intact for the employees.
Hughes believes LF officials should have begun the process of preparing exit packages for all their employees in anticipation of a Chapter 11 bankruptcy or a liquidation, once their top executives, W. John Short, ceo, and Linda Larsen German, president and chief merchandising officer, left. “This is not rocket science. It’s normal due diligence for a corporation,” she said.
Hughes said young people aren’t generally interested in entering the apparel and retail business, especially because the retail business, in particular, offers low salaries and long hours, including weekends. Still, she believes, “The apparel business is so secluded. This [LF Brands’ closing] only becomes common knowledge to those invested in the business. It won’t decrease the enrollment at FIT. It’s a blip on the radar screen.”
Hal Reiter, ceo of Herbert Mines Associates, the executive recruiting firm here, observed, “My view is it’s sad for the employees. My experience is the industry takes care of its own. Johnny Pomerantz is a very humane person. When the company gets acquired by a private equity firm, they pay less attention to the human side than the balance sheet. These things are very rare — it’s not an indication about our industry.”
Kirk Palmer of the executive search firm bearing his name pointed out that when an investment banking firm like Three Cities Research gets involved, it doesn’t go in because it wants to run an apparel business.
“They buy it with an exit strategy in mind,” he said, noting that it either sells it or takes it public. “When they realize that their investment isn’t working out and they’re throwing good money after bad money, they decide, ‘Let’s cut our losses and get out of there.’
“For every one of those who close their business and don’t pay their people and slink into the night, others do pay their people,” said Palmer. “All these people are business people and they will do what’s in their best financial interests. It’s a cold and heartless thing to do, to shut down these businesses.”
Andrew Corrie, executive director at UBS, felt the way LF’s employees heard about their termination was extremely harsh. Still, he believes, “it’s all sort of endemic to the apparel business. Brands come and go with such regularity. Anybody who goes into that profession has to love the industry because it can go from boom to bust. But I feel very sorry for those guys and the unnecessarily distant way it was communicated.”
“Some brands are worth more dead than alive,” observed Marshal Cohen, chief apparel analyst at NPD Group, the Port Washington, N.Y.-based market research firm. “It’s such a well-known brand in the midsection community. It would be an ideal private brand for a Dillard’s or Penney’s. We’ve seen the success of these big-name brands there.”
Cohen believes that LF Brands’ sudden closing won’t do much for the industry’s reputation, in part because it fired its employees Christmas week via a voice-mail message.
“When it happens once or twice, people have short memories about it. If it becomes commonplace, watch out,” he said. He said the industry already is being challenged by the technology sector, which is attracting many of the best creative people.
“If we don’t continue to take care of those who enter the field responsibly, we’ll lose recruits quickly,” said Cohen. “You look at stores like Gadzook’s and Wet Seal having issues…and people are looking at this young and fun business and feeling that it’s no longer young and fun. Stores go black all the time, but not a major company with a name everybody’s heard of.”
Harry Bernard, executive vice president and chief marketing officer at Colton Bernard, the San Francisco-based consulting firm, believes the employees of LF Brands should have seen the writing on the wall. “The real message to all of this is, when you are dispensing a brand into this industry, either you support it and make certain it has an identity, or you’re in trouble,” said Bernard.
Howard Bader, managing partner at the law firm Ballon, Stoll, Bader & Nadler, also felt the company was caught in a downward spiral. “It’s not surprising. It was inevitable. There were problems there and a lot of bad will going on.”
As for pulling the plug so fast, Bader said, “That’s the way of the world. You can’t fault [CIT] for that. Sometimes banks act too fast. After Sept. 11, there was a lot of feeling for people. Now it’s back to business again.” He believes the government has to look at this case more closely. “People were not getting paid. The district attorney will look into it. There could be some violations,” he said.
Jeffrey Kapelman, principal in Hilldun Factors, a factoring company here, said fortunately, he doesn’t see a lot of companies shutting down. Asked if he believes it hurts the apparel industry, he said the business already has a rough-and-tumble reputation “and this reinforces it, but people look at every situation independently.”