New life for Lillian

Nov 01, 2006 10:30 PM  By

In the vast ninth-floor conference room at the White Plains, NY, headquarters of Lillian Vernon Corp., president/CEO Michael Muoio is on the edge of his seat — literally. He’s anxious to begin talking about the gifts and housewares cataloger, which has been in a tailspin in recent years.

On this steamy August morning, the gregarious Muoio takes a sip of coffee before getting to the point: “It’s been pretty well known in the industry that this company has been struggling for three years.” Muoio pauses for effect before continuing: “I’d like to make an announcement to the trade that Lillian Vernon is back.”

That’s a bold statement from someone who’s been at the helm for only three months, but Muoio’s confidence in the brand hasn’t wavered since Boca Raton, FL-based investment firm Sun Capital Partners acquired Lillian Vernon Corp. from Direct Holdings Worldwide on May 30. Hours after announcing the acquisition, Sun Capital named Muoio as president/CEO of Lillian Vernon, replacing Jonathan Shapiro as president. Ever since, Muoio says, “we’ve been working very, very hard.”

The company was in need of a lot of hard work. Lillian Vernon has been privately held since Direct Holdings purchased it in July 2003, but during its final years as a public company, its revenue was $287.0 million for fiscal 2001, $259.6 million for fiscal 2002, and $238.0 million for fiscal 2003. Sales now hover at about $180 million, Muoio says.

“We’re a catalog that has slipped since the late 1990s in terms of our revenue,” Muoio says. “When we were public, we were approaching a $300 million company. We were profitable. What’s happened to LV? I think we can fairly and safely say that we lost our merchandising way and our methodology.”

Charged with helping Lillian Vernon Corp. find its way again, Muoio certainly has experience in helping catalogs grow. During his stint at Oshkosh, WI-based gifts and home goods cataloger Miles Kimball — from 1991 until he resigned as CEO in October 2005 — the company’s annual sales climbed from $50 million to $200 million. Like Lillian Vernon, Miles Kimball sells practical items and novelties targeting value-conscious, middle-income, middle-aged Middle Americans.

“He’s the right guy for the job,” says Craig Battle, managing director of Princeton, NJ-based investment bank Tucker Alexander, who was involved in discussions when Muoio, while with Miles Kimball, thought about merging Miles Kimball and Lillian Vernon Corp. “I know him well. Mike is a very talented, hard-working, knowledgeable catalog executive who obviously ran a similar business with Miles Kimball. I believe he can turn it around. I’d put money on Mike.”

Battle points out that Sun Capital knows Muoio well too: The investment firm had owned Miles Kimball from June 2001 until April 2003, when it sold the company to manufacturer/marketer Blyth.

When asked if he thinks Lillian Vernon can return to the profitable business it had been until the late 1990s, Muoio says, “I don’t think it will. I know it will because of the fundamental things being done here.”

Too much too soon

When Direct Holdings’ parent company, a private equity fund managed by Ripplewood Holdings and media management firm ZelnickMedia, acquired Lillian Vernon in July 2003, it knew that the cataloger was in need of a turnaround. But the new owners didn’t have catalog experience. ZelnickMedia principal Strauss Zelnick dismissed any concerns at the time: “We see direct marketing as media,” he told Multichannel Merchant (then Catalog Age). “Lillian Vernon is an extraordinary brand that appeals to all of America — particularly women. We think there are a lot of extension opportunities to other media, such as home shopping on TV and expanding its Web presence.”

And in fact the company implemented a number of wide-ranging initiatives: a syndicated column by company founder Lillian Vernon herself for Scripps Howard News Service, a corporate gifts business, licensing agreements, and a home-party business.

But some believe that Direct Holdings tried to do too much at once. They “changed a lot of the moving parts all at one time,” says Michael Grant, managing director for New York-based strategic consulting firm Winterberry Group. “There wasn’t enough time to see those moving parts through, and there were too many stops and starts with a number of different initiatives.”

You could also make the case that none of these initiatives focused on the fundamentals of the catalog business — merchandising, operations, customer acquisition and retention.

But catalog veteran Muoio is homing in on the fundamentals. Chief among them is consolidating the company’s facilities. Plans are to close the White Plains office, which is about a half-hour north of New York City, by the end of the year. The entire operation in late October was scheduled move to Virginia Beach, VA, where the cataloger already has its distribution center.

The move ends the cataloger’s long-time association with New York’s Westchester County. (Its name is a combination of the founder’s first name and its initial Mount Vernon, NY, location.) But the company will be more efficient “being all together under one roof,” Muoio says. “I am absolutely confident that we will improve our warehouse performance, and you do that together with merchandising. You don’t do that in isolation.”

Lillian Vernon experienced back-end performance issues when in 2004 it doubled the number of items available for personalization, from 1,000 SKUs to 2,000. “We put a tremendous amount of pressure on personalization,” Muoio says, using the first-person “we” even though he hadn’t been part of the company at the time, “and that got them into gridlock. We had a very difficult customer care year that year. It was a little better last year. We returned to 1,000 SKUs and then took it to 750 SKUs.”

To make its fulfillment more efficient, the company is looking to move away from wave-batch picking, which requires orders to be combined after the personalization process. Given that “77% of all boxes shipped contain at least one item of personalization,” Muoio says, an order-based picking system will probably better suit Lillian Vernon’s distribution center.

Fifteen of the White Plains employees opted to move with the company, Muoio says, which means additional hiring will occur in Virginia. “We’ve had over 1,500 resumes land in Virginia Beach,” he says. “We’re getting inundated with people who want to join us.” People in the industry know that Lillian’s back, he reasons, and they may be thinking, “maybe the ship’s leaving and maybe I should try to get on it. Most people who want to work in catalog companies want to see ascendancy. They want to see growth and want to be a part of that.”

As of late August, 48 people were working in White Plains, down from 128 prior to the acquisition by Sun Capital. Just about every department was scaled back: merchandising, marketing, the online group, creative services, and accounting. Circulation planning has been outsourced to Montclair, NJ-based consultancy Marketsmith.

The staff reductions were difficult, Muoio says, but necessary. “It was disappointing to many, but they clearly understood why it had to be done. Lillian was highly supportive during that process. We met with the teams and had several employee meetings.”

Lillian back in the limelight

Muoio’s casual mention of founder Lillian Vernon is striking in that shortly after Direct Holdings acquired the business, Vernon was more or less bumped upstairs, given the title of nonexecutive chairwoman and relieved of most of her merchandising duties.

“I said from the beginning that Lillian is continuing with the company,” Muoio says. “In fact, she is in New York now scouting product for us. She’s a tremendous mentor for me and the organization, a wonderful guide for our design when the books are created. Every single book is reviewed by Lillian, front to back. We solicit her comments, we pay attention to her comments, and we typically respond to them.”

Vernon started the business from her kitchen table in 1951. A pregnant housewife at the time, Lillian Hochberg used $2,000 of wedding-gift money to buy a supply of purses and belts and placed a $495 ad in Seventeen magazine, offering personalized belt purses. The ad generated $32,000 in orders, and a full catalog of personalized gifts followed six years later. Vernon, who eventually changed her name to match the company’s, became known for using her “golden gut” instinct for merchandise.

“She continues to have a tremendous eye and a tremendous impact on the business,” Muoio says. “We will embrace Lillian’s input, where I think she was more limited in the past.”

While no one contacted for the story would say outright that the previous owners had made a mistake in making Vernon a figurehead, Winterberry Group’s Grant thinks Muoio’s decision to bring her back in a more active role is a master stroke. “I don’t think she’ll ever lose her touch,” he says. “Being successful for 40-50 years didn’t happen by chance. She is the architect of this business.”

Muoio is “obviously convinced that Lillian brings the merchandising acumen back to the business,” says Battle. “I have great respect for Lillian Vernon. If she’s back, somebody thinks she hasn’t lost her ‘golden gut,’ and that’s a good thing.”

Michelle Gershkovich, executive vice president of merchandising and planning, describes Vernon as “a little bit larger than life. She’s got so much character. For a woman to start a business back in the 1950s, to be one of the first merchants to be in Asia — she was at the vanguard of merchandising as well as cataloging.”

“Day one when I showed up,” Muoio recalls, “I told her, ‘You know, Lillian, every fiber of my body, my brain, and my body is dedicated to getting your namesake back to its iconic status in the industry that you earned.’ And I think she shed a little tear. She knows what I’m committed to. She feels comfortable with that. She knows we’re embracing her. She’s part of our team moving forward.”

Vernon is so much a part of the team that Muoio wants her down at the headquarters as much as possible. He cheerfully admits to pushing brochures for condominiums in the Virginia Beach area on Vernon to encourage her to be closer to the company.

Rolling back prices

By making Vernon more active in the core competencies of the business, Muoio is making it clear that he intends to bring merchandising to the forefront once again — paying strict attention to assortment planning, seasonality, and pricing.

Shortly after Muoio was hired, he reviewed several key areas with Gershkovich, who’d spent four years with toys cataloger/retailer FAO Schwarz before joining Lillian Vernon two and a half years ago. “Michelle provided me with internal information in terms of average price offered in the books vs. average price sold, and there was this huge gap,” Muoio says. “I thought, We have to reduce these prices so that we’re fishing where the fish are. That indeed is really what we did. In this past season, previous management raised prices about 10% in total. That was less than helpful.”

The increase in prices, Battle suspects, was Direct Holdings’ way of trying to improve margins. But it also probably contributed to a loss of focus in terms of product assortment and to further declines in sales, which led to even more bottom-line erosion, not to mention a shrinking house file.

“Merchandising is the engine of all catalogs,” Battle says. “If you lose your merchandising focus, then that’s tough. We’re in a very competitive environment, and the stuff they’re selling has to be compelling. I suspect there were margin pressures, which certainly would explain why they raised prices. Margins at the end of the day are the keys to the bottom-line health of the company.”

Now, Muoio says, “we retraced our steps and are completely focused on units and contribution vs. sales. We’re actually rolling back prices on about 40% of our fall items.”

The merchandise assortment has been tightened as well. Whereas last year the company offered 2,100 SKUs, it’s entering the 2006 holiday season with a selection of 1,554 SKUs. Eliminated were higher-priced, slower-selling products and “all items over $100,” Muoio says. The percentage of new products was scaled back as well, from about 40% to 20%, as a means of risk control. “By having 40% new merchandise and only succeeding 30% of the time, that means 70% of the new products would fail,” Muoio explains. “That’s too much risk in our business.”

And as of October, the company is no longer offering free shipping and handling, which it had for the previous two and a half years on orders of at least $40. “It’s coming back to the focus of merchandising and giving the customer a reason to come to us based on merchandising as opposed to a gimmick of free shipping and handling,” Gershkovich says.

But personalization remains free. Gershkovich says the company had charged for personalization for seven or eight months in 2004, but Muoio isn’t about to try that tactic again. “Free personalization is a key differentiator, whereas free shipping and handling, anybody can do that,” Muoio says. In fact, the fall and holiday editions include cover lines emphasizing that personalization is always free.

“About 75% of what we ship in a typical holiday season is personalized,” Muoio continues. “We have a tremendous capacity to do personalized merchandise at a higher level than other people in the business.” Even after scaling back on the number of SKUs that the warehouse will personalize, about 50% of its merchandise mix is available for personalization. “Our closest competitor is around 45% and then it drops off to 25%,” he says.

Circulation is another core competency that Muoio has made a priority. “For the first time, we are differentiating our books in terms of the pagination. We have 2 million people we consider to be our best buyers, and they will be receiving this fall a 160-page catalog vs. the standard 116-page catalog.” The larger catalog includes the complete Lilly’s Kids line of toys and children’s furnishings, whereas the smaller version has only an abridged selection.

During spring and summer, in fact, Lilly’s Kids will no longer mail as a stand-alone catalog, though along with the core catalog it will mail twice a month from August to December, for the crucial back-to-school and holiday seasons. The company has also stopped mailing its Favorites and Personalized Gifts titles, which had dropped twice a year.

As far as annual circulation, it’s down from 96 million last year to 80 million-85 million for 2006. “We believe our frequency was too high, but we’re increasing our pagination per book,” Muoio says. “We’re mailing more pages but with less frequency, and that plays into where the USPS is going” in terms of rate increases.

The catalog creative is changing too. With the October issue, the catalog has reverted to its signature 8″ × 8″ trim size, which was expanded to a standard size in 2004. And the logo of a silhouetted woman carrying a bag in each hand, introduced in late 2004, is gone as of the October issue.

“We shed the woman with the handbags,” Muoio says. “We tested. There was no lift. I saw no reason not to change it. We’re certainly not performing now, so we’re going to go back to when we did perform and clean it up a bit from where it was, and that’s exactly what we did.”

One might say that the theme of the new Lillian Vernon is “back to the future.” The company is “going back to the essence of the brand through merchandising, pricing, and packaging,” Muoio declares. “We’re going to ride that pony because it works.”

As for gauging success, Muoio says progress will be monitored on a weekly, monthly, and quarterly basis. But he expects the company to be profitable within a year. As for a long-term, strategic goal, “we hope to get back to being the $300 million cataloger we once were, back to that iconic status. I believe it’s achievable. I wouldn’t be here if I didn’t believe that.”

Muoio also believes that he and his team at Lillian Vernon have all the bases — and basics — covered as they head into the fall season. “Here’s a case where the challenges that have developed over the past three years have been identified, and now it’s pure, unadulterated execution. And if you want to be part of that program, come join us in Virginia Beach.”

Several of Muoio’s former colleagues at Miles Kimball already have joined: Marcus Swieca, as vice president of creative services, and Russ Fichter, as director of studio services. And John Buleza, former senior marketing director at jewelry and decor cataloger/retailer Ross-Simons, is now Lillian Vernon’s marketing director. Clearly they, like Gershkovich, share Muoio’s confidence. “There is a plan,” Gershkovich says. “It’s clear, it’s not vague. We have a lot to do, but let’s get it done.”

Lillian Vernon

TIMELINE

1951

Lillian Hochberg uses wedding-gift money to buy a supply of purses and belts and places a $495 ad in Seventeen magazine, selling personalized belt purses; the ad brings in $32,000 in orders.

1954

Vernon Specialties (named after Mount Vernon, NY, where Lillian lives) rents three distribution facilities to fulfill orders.

1956

Company mails its first catalog — 16 black-and-white pages — to 125,000 customers; products include personalized combs, blazer buttons, and collar pins

1965

The business incorporates and is renamed Lillian Vernon Corp.

1970

Company rings up its first $1 million in sales

1987

Lillian Vernon Corp. goes public (Amex: LVC)

1988

National distribution center is built in Virginia Beach, VA

1993

Company headquarters relocates from Mount Vernon to New Rochelle, NY

1995

Company begins selling merchandise via the Internet

1998

Headquarters moves from New Rochelle to Rye, NY

2000

Business makes its first — and only — acquisition: decor cataloger Rue de France

2003

Direct Holdings Worldwide (formed by Ripplewood Holdings and ZelnickMedia Corp.) buys company and takes it private

2004

Headquarters moves to White Plains, NY; Lillian Vernon catalog and Website are redesigned; Rue de France business is folded

2006

Sun Capital Partners buys Lillian Vernon Corp.; Michael Muoio is named president/CEO; headquarters will move to Virginia Beach, VA