The Leslie Fay Company, Inc.

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The Leslie Fay Company, Inc.

1412 Broadway
New York New York 10018
U.S.A.
Telephone: (212) 221-4000
Fax: (212) 221-4245

Public Company
Incorporated: 1984
Employees: 444
Sales: $197.4 million (2000)
Stock Exchanges: NASDAQ
Ticker Symbol: LFAY
NAIC: 31523 Women’s and Girls’ Cut and Sew Apparel Manufacturing

The Leslie Fay Company, Inc. sells its career, evening, and social occasion dresses and its sportswear through leading department and specialty stores nationwide. The company’s moderate-priced brands include Leslie Fay, Leslie Fay Haberdashery, Joan Leslie, and Reggio, while its better-priced brands include David Warren, Rimini by Shaw, Outlander Sportswear, and Hue. Leslie Fay is a licensee for Liz Claiborne and Elisabeth dress labels and Cynthia Steffe label. The company has operated continuously since 1947 despite entering bankruptcy protection from 1993 to 1995.

1947–82: A Family-Run Business With a Distinctive Style

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 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 business 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.

Major changes in the 1980s

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 Pomerantz 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—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 signaled 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 long-time 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 an $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 at the company’s all-time peak of $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.

Early 1990s: Lagging Sales Turn to Losses

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 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, kneesocks, body wear, and leggings. Leslie Fay anticipated that the purchase of this company would give it 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. 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. Specifically, Leslie Fay fashions were criticized by some 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, in part 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.

Management announced a long-term marketing strategy that included reducing prices on its dresses by at least ten percent in the fall of 1992. 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 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.

In September 1992, when fall orders had not picked up, Pomerantz ordered price cuts across the board on all future orders. The company also began offering retailers rebates or markdown money of millions of dollars if they had to slash prices on Leslie Fay apparel to move their inventory—a common practice in the industry, though Leslie Fay’s were uncommonly high rebates. Retailers and other businesses in the industry were surprised; the expected response to slow sales was to cut production. Instead, the company would have to sell more merchandise, albeit at more attractive prices, to make money.

Key Dates:

1947:: Fred Pomerantz founds Leslie Fay.
1952:: Leslie Fay goes public.
1972:: John Pomerantz becomes president of the company.
1982:: Leslie Fay is taken over through a leveraged buyout and is taken private.
1984:: The company becomes known as The Leslie Fay Companies, Inc. in a second leveraged buyout.
1986:: Leslie Fay goes public a second time.
1991:: Leslie Fay sells its Head Sports Wear division to Odyssey International Group.
1993:: The company declares bankruptcy following the discovery of accounting improprieties.
1997:: The company emerges from bankruptcy with the distribution of its equity into The Leslie Fay Company, Inc. and Sassco Fashions Ltd.
1998:: Leslie Fay acquires The Warren Apparel Group Ltd.
2000:: John Ward replaces John Pomerantz as head of the company; the company purchases the assets of Cynthia Steffe.

The plan appeared to succeed at first. Despite the recession that had hit the national economy and the garment industry, 1992 appeared to be a favorable year for Leslie Fay with profits of $23.9 million. Pomerantz and others received substantial bonuses based on the company’s reported $23.9 million profit. Pomerantz alone received $2.2 million. Leslie Fay announced plans 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. 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.

Then, in late January 1993, Pomerantz learned that the company’s books had been doctored to inflate pretax profits by $81 million from 1990 to 1992. According to reports, Pomerantz had not paid 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. News of the discrepancies sent Leslie Fay stock plunging from 12 and three-eights in January to five and one-quarter per share by the beginning of March. Several stockholders initiated lawsuits against the company.

In fact, analysts had heard rumors of declining sales in July 1992. The company noted that orders for the fall season were down, but shortly thereafter the company forecast earnings for 1992 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 knew nothing about the overstated profits or doctored books, which in 1996 proved to be the work of the company’s chief financial officer. Pomerantz and the other company officials returned their bonuses shortly after the 1992 losses were revealed. 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. However, 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 poor response to the company’s merchandise. It became impossible to cover a shortfall with revenue from the next quarter as sales dropped.

The Late 1990s: Bankruptcy and Turnaround

The company entered bankruptcy protection two months after the disclosure of accounting improprieties. In response to the news, some of traditional department stores cut their orders, but others remained loyal. In fact, the company did gain a client, when J.C. Penney began to sell Leslie Fay products beginning in 1994. In October, Leslie Fay axed its Theo Miles line, and Laura Pomerantz left the company. Before year’s end, it shut four of its five U.S. plants, eliminating 1,050 jobs, but hired another 600 workers at its last remaining plant after a garment worker union strike. That plant closed the following July. Leslie Fay reported an operating loss of $27 million in 1994 and a net loss of $159 million.

Management announced plans in January 1995 to emerge from Chapter 11 by focusing on its core dress and sportswear businesses—Leslie Fay Dress, Leslie Fay Sportswear, Outlander, and Castleberry—and selling or spinning off its biggest money maker, Sassco Fashion, while disposing of its retail store division. Sassco had contributed about half the company’s 1994 revenue of $535 million. Arthur Levine, who headed Sassco, and who had sold it to Leslie Fay 15 years earlier, stepped forward with an offer to buy the unit back, but was unable to come up with the necessary financing. Despite its internal difficulties, Leslie Fay dominated Women’s Wear Daily’s “Fairchild 100,” with five of the industry’s top 10 recognized brands. The company reported an operating profit of $1.2 million on net sales of $445 million in 1995.

In January 1996, another buyer for Sassco stepped forward, but Leslie Fay decided instead, in March 1996, to spin off the division and distribute 80 percent of 3.4 million new shares of Leslie Fay to its creditors. Creditors were to take 80 percent of Sassco’s shares, while the division’s management, including Arthur Levine, received 20 percent. The company finally emerged from bankruptcy in mid-1997 with the distribution of its equity into two newly formed entities: The Leslie Fay Company, Inc. and Sassco Fashions Ltd.

Despite falling to third position in the Fairchild 100 for 1997, Leslie Fay continued to generate profits for the next several years: a gross profit of $30 million on net sales of $132 million in 1997; a gross profit of $36 million on sales of $152 million in 1998; and a gross profit of $49 million on net sales $197.4 million in 1999. In 1997, the company relaunched its Haberdashery Sportswear label; it also reintroduced Leslie Fay Evenings and launched a moderate suit line in 1998. That year, Leslie Fay also acquired The Warren Apparel Group Ltd., a privately owned, New York City-based manufacturer and wholesaler of women’s career, social, and evening dresses.

Perhaps more importantly, in 1999, the company obtained the license to the Liz Claiborne Dresses and Elisabeth Dresses labels, and sold the license for its Outlander Sportswear better knitwear label to Regent International. It also sold the license to its Leslie Fay trademark to Bruscan, Inc. for a line of women’s shoes. In 2000, the company purchased the assets of Cynthia Steffe, Inc., a designer of sportswear for the young contemporary market.

The pared-down Leslie Fay had pulled off an impressive turnaround. Consumer demand for the Leslie Fay name remained strong, and the company had won back space on department store floors. Shares in the company began trading again in December 1998. In 2000, in a change of leadership, John Ward, who had been with the company since 1989, replaced John Pomerantz as chief executive of the company. Leslie Fay had not yet recaptured its former industry dominance, but the company had by now proved its staying power.