The Leslie Fay Companies, Inc.

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The Leslie Fay Companies, Inc.

1400 Broadway
New York, New York 10018
U.S.A.
(212) 221-4000
Fax: (212) 221-4045

Public Company
Incorporated: 1984
Employees: 4,500
Sales: $836.6 million
Stock Exchanges: New York
SICs: 2335 Women’s/Misses’ Dresses; 1337 Women’s Misses’ Suits and Coats; 2339 Women’s/Misses’ Outerwear; 2341 Women’s/Children’s Underwear

The Leslie Fay Companies, Inc.—the second-largest maker of women’s clothing sold to department stores—designs, manufactures, and markets moderately priced and better priced women’s dresses, suits, blouses, coats, and sportswear. Its clothes are marketed under several labels, including Albert Nipon, Kasper for A.S.L, Evelyn Pearson, and Castleberry Knits.

Leslie Fay was founded in 1947 by Fred Pomerantz, who had produced dresses for the Women’s Army Corps during World War II. The company was named for his daughter and offered department stores substantial profit margins for carrying the company’s line of stylishly conservative women’s wear. Pomerantz was a colorful figure in the New York garment district; he reportedly had a liking for gambling, and people on the street knew when he was at work because his distinctive Rolls-Royce was parked outside the company’s Broadway offices.

Leslie Fay went public in 1952. From 1959 until April of 1982, the business was called Leslie Fay Inc. Pomerantz’s son John became president of the company in 1972. He had joined the company in 1960, right after he graduated from the Wharton School with a bachelor’s degree. John continued to run the company much as his father had run it. When other companies were turning to computers in the early 1980s to help keep track of daily sales at stores around the nation and were using market testing to determine whether its styles would sell, Leslie Fay continued to make deals with a handshake and telephone stores weekly for sales figures, unlikely business practices for a public company of its size. Practices such as these may have worked for a smaller company, and it may have worked before the 1980s, a decade of takeovers and business opportunism. In 1982 Leslie Fay was taken over through a leveraged buyout for $58 million and became a private company operating under the name The Leslie Fay Company.

In 1984, in another leveraged buyout, the company became known as The Leslie Fay Companies, Inc. This time, management and outside investors paid $158 million to buy out the investors from the 1982 takeover. The leveraged buyout by managers and investors brought John and his wife, Laura (also a company official), 1.7 million shares of stock, or a 8.7 percent share, for which they paid $162,000; that worked out to a bargain at only nine cents a share. In 1986 the company went public again, however, with management and institutional investors still controlling 55 percent of the outstanding shares.

The fashion industry in general was enjoying a period of prosperity in the mid-1980s, and Leslie Fay was growing fast. Leslie Fay and other garment industry companies, though, were subject to the ups and downs of fashion, and Leslie Fay watched its stocks rise and dip, from $18 per share in 1986, down to $9 in 1989, and then up to the upper teens again by the early 1990s.

Leslie Fay acquired several companies during the end of the 1980s, buying the assets and trademarks of Albert Nipon, Inc., for $8.3 million and Mary Ann Restivo, Inc., for $5.3 million in 1988. It also assumed Mary Ann Restivo’s $3.9 million in liabilities. In 1989 Leslie Fay acquired Non-Stop Fashions, Inc., and NS Petites Inc.

All of these changes signalled a new era for Leslie Fay, which had awakened to the need to transform its image. It had received feedback from upscale stores, which were longtime customers, that Leslie Fay apparel was too drab and matronly. Leslie Fay responded to the criticism by bringing in new designers. It also adopted a new marketing approach, following the lead of Calvin Klein and Liz Claiborne by opening boutiques within department stores. Pomerantz convinced 500 retailers to install the boutiques, even though there were doubts that Leslie Fay’s $100 dresses could generate enough sales to justify the expense.

Leslie Fay also updated its marketing by talking directly to consumers through fashion shows and videotapes and by inviting consumers to talk directly to the company through a toll-free phone number. It also launched a $8.5 million ad campaign. The new approach paid off, and Leslie Fay left behind its production-oriented approach to become a sophisticated, consumer-driven dress manufacturer. In 1990 sales revenues were $859 million, triple what they had been only ten years earlier.

Because Leslie Fay had a strong brand name, it phased out some labels and replaced them with a Leslie Fay label. It also sought to broaden its base by licensing the use of its name for coats, shoes, lingerie, and children’s clothing, so that the company would become known as a manufacturer of a broad assortment of moderately priced clothing.

In 1991 Leslie Fay sold its Head Sports Wear division to Odyssey International Group in order to focus on women’s apparel. Leslie Fay received $47.5 million in cash and non-interest-bearing notes for the division that carried ski, tennis, and golf apparel for men and women. Pomerantz used the proceeds from the sale to reduce the company’s bank debts.

In June of 1992 Leslie Fay announced it would acquire Hue International, a hosiery firm with 1991 sales of $35 million. Hue sold colorful legwear for women, including tights, socks, knee-socks, bodywear, and leggings. Leslie Fay anticipated that the purchase of this company would give Leslie Fay entry into a segment of the apparel market that it had not previously reached.

Despite positive changes through acquisition, Leslie Fay needed to stimulate lagging sales, and reduced prices on its dresses by at least ten percent in the fall of 1992. Management announced that this was part of a long-term marketing strategy. Its dresses and pantsuits, which had sold for $89 to $139 each, were lowered $10 to $20. Leslie Fay felt the price reduction would not hurt the company because now it would sell more dresses before marking them down. It announced that it would reduce the number of styles it made and also planned to discontinue its Mary Restivo label. The Mary Restivo division had losses of $2.9 million on sales of $5.5 million.

Despite the recession that had hit the national economy and the garment industry, 1992 appeared to be a favorable one for Leslie Fay until October of that year. Instead, 1992 turned out to be one of the worst years of the company’s existence, although the extent of the problem was not known until early 1993. Until then, despite several warning signs, Pomerantz, industry analysts, and Wall Street investors had no idea that Leslie Fay was not as healthy as profit statements seemed to indicate.

In late January of 1993, Pomerantz learned that the company’s books had been doctored to show 1992 profits that did not exist. Although there did not seem to be any funds missing, outside auditors determined that the company had not had profits of $23.9 million as reported, but instead had actually lost $13.7 million. The last quarter of 1991 had also been misreported—by as much as 42 percent. News of the discrepancies sent Leslie Fay stock plunging from 12⅜ in January to 5¼ by the beginning of March. Several stockholders initiated lawsuits against the company. According to reports, Pomerantz did not pay close attention to the financial operations of the company, which were not even housed in the New York headquarters but were instead located in Wilkes-Barre, Pennsylvania.

The company had a reputation for creating pressure to meet profit goals, but 1992’s profit goals were particularly ambitious because of an unhealthy economy and a 20-year decline in dress sales, a disquieting trend for Leslie Fay because they depended on dress sales for one-third of its total sales. The company also faced serious problems with retailers’ and consumers’ negative responses to its apparel lines.

Leslie Fay fashion styles had been criticized as over-priced and old-fashioned. Department stores had been cutting back on orders, in part because they were having a hard time selling Leslie Fay fashions specifically, but maybe even more significantly because many department stores were in trouble due to serious competition from discount and outlet stores. Leslie Fay’s marketing strategy, however, still centered around department stores, some of which were filing for bankruptcy, including key Leslie Fay customer, Macy’s.

According to the Wall Street Journal, while the company was reporting profits and keeping its stock prices up, Pomerantz had been calling department stores to try to persuade them to order more Leslie Fay merchandise. Many retailers said they had cut their Leslie Fay orders by as much as 15 percent in the previous two years. It was reported that Pomerantz was offering the retailers rebates or markdown money of millions of dollars if they had to slash prices on Leslie Fay apparel to move their inventory. Markdown money—payment that the manufacturer gives stores in cash or discounts on future orders as a guarantee of profits even if the store has to mark down the merchandise—was a common practice, but Leslie Fay’s markdown money allegedly was extremely high by industry standards.

Analysts had heard rumors of declining sales in July of 1992. The company noted that orders for the fall season were down, but shortly after that the company forecasted that earnings for 1992 would be higher than those for 1991. Pomerantz had also offered to buy back up to a million shares of Leslie Fay stock, a move that showed his own optimism about the company and reassured Wall Street.

Pomerantz said he had expected fall 1992 orders to pick up, but in September, when they had not, he ordered the price cuts across the board on all future orders. Retailers and other businesses in the industry were surprised because the expected response to slow sales would have been to cut production. Instead, the company would have to sell more merchandise, albeit at more attractive prices, to make money.

In October Pomerantz announced a substantial decline in net income because of the difficult retail market. Company officials, however, still did not question the profits recorded at year-end. Pomerantz and others received substantial bonuses based on the company’s reported $23.9 million profit. Pomerantz alone received $2.2 million.

Pomerantz said he knew nothing about the doctored books and that it appeared to be the work of the company controller and his staff. According to the Wall Street Journal, the misleading figures were chiefly an overstatement of the number of garments manufactured, coupled with an understatement of the manufacturing cost of each item. Leslie Fay’s strategy of cutting prices instead of production could “inflate phantom profits.”

The Wall Street Journal noted that such accounting practices were not uncommon among small, private companies in the industry. But Leslie Fay had grown into a large public company, and for a business its size to play the small company game, the results were disastrous. According to ex-employees, in order to meet profit goals invoices were backdated and recorded as revenue even though the money had not been received. The financial department might have survived this practice if the market had remained strong, but the recession hurt performance, as did a poor response to the company’s merchandise. It became impossible to cover a shortfall with revenue from the next quarter as sales dropped. The Wall Street Journal noted that the company had fostered such deep reservoirs of good will since its founding by Fred Pomerantz that the company’s serious problems were ignored for too long by the rest of the industry and department stores.

Pomerantz and the other company officials returned their bonuses shortly after the 1992 losses were reported and placed responsibility on the shoulders of the controller—who had confessed to the misstatements of profit. Industry analysts, company officials, and others wondered what his motive could have been. The compensation package of the controller was not tied to profits, and no money was missing. According to Pomerantz, senior level management had known nothing about the overstated profits.

Leslie Fay was still picking up the pieces of its accounting mess long after the discrepancies were revealed. But business had to go on. Pomerantz claimed that the incident did not threaten the company’s viability. Just before the profit misstatements were discovered, Leslie Fay had announced big plans that the company expected would boost sales. It planned to replace its Breckenridge, Joan Leslie Evening, and Outlander labels with one new label, Theo Miles. The Theo Miles brand was intended to compete in the $2-billion better-price market against the leader Liz Claiborne. Leslie Fay predicted that the new line would bring in wholesale earnings of $130 to $140 million in its first year and $500 million by 1998. Laura Pomerantz, who had been a senior vice president, was named to a newly created post as executive vice president over the company’s better brands, including the new Theo Miles label. She already headed the Albert Nipon and Leslie Fay Evening lines.

Although trying to look forward, The Leslie Fay Companies, Inc., in 1993 still faced several lawsuits by shareholders who contended that they had been misled about the company’s financial health. In addition, the company was faced with some serious and potentially long-term problems: declining department store sales and the perception that Leslie Fay styles are old-fashioned.