Will New Suits Make a Difference at Warnaco?


It's hard to see beyond the doom and gloom at Warnaco Group (WAC) these days. Not only have shareholders watched the apparel maker's stock plummet from $44 a share to 39 cents in recent years, the Chapter 11 bankruptcy filing on June 11 essentially turns that equity into expensive wallpaper -- at least for now. But with its bankers helping to run the store, Warnaco's fortunes may finally be turning around.

First, there's the money. Warnaco now gets a break from servicing $3.1 billion in debt and liabilities and has another $600 million to play with, thanks to a debtor-in-possession financing agreement. More important, while Linda J. Wachner remains at the helm of the company for now, her turf-hungry power is likely to diminish.

Yes, the aggressive CEO and chairwoman may own 22% of the stock, including options, but 22% of nothing is still nothing. Financially, Wachner is no longer queen of the castle. And that's good news for a company that became bloated from an unfettered acquisition binge while the value of its upscale brands was arguably diminished by the indignity of being sold through discount outlets.

BLUNT STYLE. Warnaco didn't have to sink so low. It controls such marquee brands as Calvin Klein jeans and underwear, Speedo swimwear, Warner's bras, Chaps by Ralph Lauren, and Olga. Its products are sold worldwide in more than 50,000 department, specialty, and mass-merchandise stores. It has $2.4 billion in assets and strong cash flow. As Tony Alvarez, a turnaround specialist who is Warnaco's newly hired chief restructuring officer, puts it: "This is a phenomenal company that just needs time to deal with its problems without having to service a huge debt."

Indeed. But Warnaco's problems and debts are at least partly the offspring of reckless management. Other companies have struggled through Asia's economic crisis, the collapse of key retail customers, and a domestic downturn without having their debt explode or equity collapse. But critics charge that Wachner's legendary blunt management style led to high turnover in key positions, depriving Warnaco of the talent it needed to survive in a harsh retail environment. Warnaco general counsel Stanley P. Silverstein counters that the apparel industry is known to have high turnover, adding that Warnaco has many experienced professionals with long service. What's more, he argues that management made "thoughtful, reasoned and strategic acquisitions" and has consisently maintained the integrity of its brands.

Industry observers agree that Wachner stumbled into tough times. "A lot of things were out of her control. You can't blame her for having several customers go out of business or for the Asian crisis. These things created a major problem for her," says an analyst who covers the company. "I don't think they ever missed a single payment to suppliers when they were going through bad times, either." In fact, Warnaco does owe much of its growth to Wachner, who acquired it in 1986 through a leveraged buyout and soon quadrupled its size. Many still consider her to be a savvy marketer, and they give her credit for building a stable of well-known and well-made brands that show little risk of going south with their parent company.

ROOM AT THE TOP? For now, though, the consensus view among analysts and investors seems to be that Wachner exacerbated a bad situation. Unlike Warnaco, rivals didn't reward their leaders with such overindulgent compensation packages that they took home millions even when times were bad. Most didn't acquire more companies as debt piled up. And they haven't faced such high-profile vitriol from shareholders, retailers, and even key partners -- such as Calvin Klein, who settled a suit against Warnaco earlier this year, alleging, among other things, that the company harmed his brand by dumping items at discounters. For veteran retail consultant Kurt Barnard, the blame lies squarely with Wachner. "She acquired too many things, spent too much money, and then diluted the value of her brands," he says.

That said, there are signs of hope. The appointment of Alvarez is sure to bring some financial order to the fashion giant. As the founding managing partner of New York's Alvarez & Marsal, he has played a key role in several company turnarounds -- from Charter Medical to Resorts International. "You're hard pressed to get a more credible face for the banks," says Peter A. Chapman, president of Bankruptcy Creditors' Service, which is following the Warnaco proceedings. "He may not know the difference between underwear and socks, but he's on a mission to tear this thing down and get it profitable," Chapman adds.

Warnaco is making headway elsewhere, too. Earlier in 2001, it brought on American Express Chairman Harvey Golub and Hertz Group Chairman Frank A. Olson as company directors. Those moves at least bring the aura of more independence to a board that has been heavily stocked with insiders and people who profit directly from relations with Warnaco.

$40 MILLION FAREWELL? The bigger question for many on Seventh Avenue is whether Wachner herself will survive the restructuring. One obstacle to ousting her is a severance package that could cost the company tens of millions of dollars. With creditors lined up at the door, parting with that sort of cash may not be a priority.

Even so, at least one former institutional investor insists he "won't go near that company ever again as long as she's in charge." Wachner couldn't be reached for comment June 12. But Alvarez counters that the CEO is still very much in control and working hard to devise a plan that ensures Warnaco's long-term survival. If not, it's clear that the company's lenders can now force her to move in that direction. By Diane Brady in New York


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