Doo-Doo Diligence and Buccaneer Businessmen

Numbers matter, as do people

March 2008 By Denny Hatch

multipage

Last week I did a column on the simultaneous bankruptcies of two famous catalogs—Lillian Vernon and The Sharper Image—and received a long comment from Michael Muoio, president and CEO of Lillian Vernon. (See the image below.)

His comment ran beyond 1,500 characters, and I quickly e-mailed him with effusive thanks for taking the time to write and to ask him to either cut it or finish it so I could run it as two entries with “continued” on the first one.

Muoio e-mailed me back and said, “Wanna do a phone call?”

I e-mailed him back and said sure, and that I would write the thing and let him see it before it ran.

No response. And no phone number to call him.

Finally, Muoio and I connected by phone this week.

My sadness after talking to him was acute.

The Sale
From 2001 to 2003, sales at Lillian Vernon progressively declined and losses increased. In 2003, the $250-million-a-year company lost $18.6 million. That year—50+ years after founding and running the company, and with no planned line of succession—the iconic Lillian Vernon sold her business for $60.8 million to private equity investors and it came under the umbrella of Ripplewood Holdings.

According to Michael Muoio, Lillian Vernon was essentially bankrupt in 2000. It was saddled with a very expensive “legacy IT system with multiple platforms and IBM-based.”

Lillian Vernon Under Ripplewood
Ripplewood paid $60.8 million, then sold off the building for $40 million, so the net cost was $20.8 million—less than one-tenth annual revenue. Not a bad deal.

Honestly believing they could overcome the hurdles, the new owners planned to combine Lillian Vernon with a Time-Life catalog and expand the corporate gift business. “The strategy was sound,” Muoio said, “but it was a matter of execution.” For example, $7 million was spent trying to bring the IT system into the 21st century. Ripplewood could not make it work and lost $25 million a year over the next three years. This meant negative cash flow after three years was more than $100 million with no positive results.

Lillian Vernon on Sun’s Watch
In 2006, Sun Capital Partners bought the company at a distress price of $10 million and installed Muoio as president and CEO. He honestly believed he could overcome the IT problem, but could not. On top of that, he was hit with postal and delivery increases—15% and 18% respectively. The price of paper also increased, adding an additional $15 million in costs.