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If there were a company that would qualify as undergoing a transformation over the past seven years, that would be Fifth & Pacific Cos. Inc., formerly Liz Claiborne Inc.
This year’s Summit theme, “The Transformers,” is one close to the heart of William F. McComb, chairman and chief executive officer of Fifth & Pacific, who shared some of the thinking behind the company’s difficult road to reinvention.
“It’s hard to keep me away from a discussion that’s about transformation,” said McComb. “Transformation is an ugly, hard thing to talk about. Transformations actually are rare in American business. They’re treacherous. Investors flee very quickly.”
Very few companies, except perhaps J.C. Penney Co. Inc., admit that they’re “electively and proactively” going to initiate a transformation because they’re very risky, he said. “They are expensive, by definition, and they’re unproven.” He said transformations require a change in business model, which may mean alienating and cannibalizing your company’s distribution channel and core customer. It can also mean pivoting away from old strengths and embracing and incubating new ones.
“In that process, more value tends to be destroyed before a period of great value creation is ushered in,” he said. For those reasons, he said, neither public shareholders nor private equity owners tend to embrace transformations. “That was clearly the case with our company, Liz Claiborne Inc.,” said McComb, who has sold off practically all of the company’s brands (they’re still seeking a buyer for Lucky Brand) to focus on the promising Kate Spade.
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McComb recalled that when he was hired at the end of 2006, it wasn’t the board’s mandate, nor his, to transform Liz Claiborne. “We were regarded as a stable company, we had highly stable results, and we were regarded as one of the great academies of the industry,” he said. It wasn’t until that first quarter of 2007, when the senior management sat him down and showed him the roll-up for 2007. In his first conversation with Wall Street, he guided earnings down by more than 50 percent. The company ended up performing much worse than that. Shareholders felt that the company lacked a strategy. “Specifically, their criticism was that the company had been deploying shareholder capital off a base with rich cash flow, and there was no reason why some of these new brands that were in the incubator weren’t beginning to perform. Out of that crisis came the need to articulate a very different capital and resource allocation strategy,” he said.
McComb wanted to talk about the lessons he learned “as a transformer.” So many lessons, in fact, that he prepared a “Passenger Safety Guide” for everyone in the audience. McComb shared his “Truths of Transformation.”
• “Transformation is pragmatic, not ideological. Some of the biggest flops come from visions that are rooted in business fairy tale rather than consumer and marketplace insights. Get real! Be grounded in the consumer and the market.”
He said some of the media covered “our very difficult story over the years,” and they felt that he didn’t want to be a wholesaler and wanted to lower the age of their Baby Boomer customer, in lieu of Millennials. “None of this was true. All of the decisions we made for our strategy were rooted in a study of profit pools, industry share dynamics of the brand equities we actually had, and the actual long-range plan forecasts that were rolled up and forwarded to us by each of the business groups.”
• “It will take twice as long and cost you at least twice as much as you predict ex ante. If the authors and navigators of the great innovations knew how hard it would be up front, they may never have had the guts to follow their visions. Never ever give up. And remember, in the beginning you face all the downside. The upside comes last.”
He recalled that in July 2007, they underpredicted what it would cost for new stores and marketing, and their business “was actually a lot sicker” than they realized. He said the Mexx business in Europe “was incredibly recalcitrant to turnaround.” The acquisition of May Department Stores Co., which was the largest and most profitable part of Liz Claiborne Inc. up until 2006, created a lot of problems for the company in 2007 and 2008. When he first arrived, the Kate Spade business, which today is the $1.6 billion company’s strongest driver of growth, was doing under $100 million. Over the course of the first year, they decreased the wholesale distribution and shut down some Kate Spade stores. “Sales plummeted to $50 million, and we lost almost $25 million in EBITDA [earnings before interest, taxes, depreciation and amortization] in order to turn it and get to where we are now, which is a business of $700 million in sales, and EBITDA well over $100 million,” he said.
• “Brace yourself. The world has its eye on the rearview mirror. Cognitive dissonance reigns. The media, the stock market and many other key stakeholders will measure and magnify every inch. It gets personal. But the rearview mirror is irrelevant. Source all your energy from the future.”
He said it never ceased to amaze him that with all the work they were doing and having a giant corporation with 50 brands, all anyone ever wanted to talk about was what was happening with the Liz brand.
“People were highly critical because it began to look like we were abandoning the sacred Liz brand,” he said. But in fact, what they were doing was licensing the brand with Penney’s, which eventually acquired it, which “put that brand in better shape than it had been in years,” he said.
• “Be prepared for iteration: You will make mistakes over and over. Update your thinking. Be openly self-critical. Readjust the plan, if not the vision. But don’t throw the baby out with the bath water.”
• “The big bang theory doesn’t work. Transformation requires chunks and bites.” He said the company recognized it would take a long time and they did sequence things. “Transformation takes many steps — some are concurrent, but most are sequential. Don’t take shortcuts.”
• “Reach beyond the obvious. The biggest innovations almost always come from industry outsiders. That’s because it is easier to create something from nothing than it is to realign something that is well-established.”
• “Leverage your political will. It’s the collective force that brings together the hearts and minds, mustering the commitment and resources to address unsustainable strategies or take on risky, long-term challenges. In a turnaround, all decisions become tough decisions. Few will be popular. Making the case for change can be the hardest part.”
• “It is always darkest before dawn. Things get worse before they get better. When you embrace change, havoc is released. Never lose perspective — it is supposed to be hard and scary and risky at that stage — before it gets brighter and better. Sometimes just reminding each other of this helps get through this phase.”
• “Crisis is the mother of invention. The most successful transformations come from real crisis. The tougher it gets, the tougher and more creative you need to be. Modify and change your plan as you go. But always harness the power of the crisis to fuel your success.”
He said people hate the word “crisis.” He has found that people give their most in a crisis. “The key is, as the leader, you’ve got to pay your teams off. We could not have made it in seven years of crisis. There’s respite along the way. There are successes that can be celebrated. That, in turn, refuels people.”
• “It’s not for the faint of heart. Not everyone can navigate the uncertainty that prevails. Some people just can’t cut it. Even some really good, strong and accomplished leaders buckle.”
• Never take your eye off the prize. How you define success for your strategy, and what your transformation is, can’t be the totality of a whole vision. It has to have a core to it, and you’re unwavering to that core.”
Gilbert Harrison, chairman of Financo Inc., asked what keeps McComb up at night. “Those years — 2008, 2009 and early 2010 — were really dark days,” he said, noting that Claiborne’s shares fell to $1 and they were facing bankruptcy. He said things within Fifth & Pacific have gone the right way. “They’re now predictable. We have a very, very, bright future and long runway growth,” said McComb.
McComb was also asked if there was a tipping point when he felt it was time to move away from the multibrand model. “Actually, we were in the depths of despair in the first half of 2007, and we were way off track.” He realized that the greatest value creation came from monobrands and direct-to-consumer retail companies. They decided to take the three brands — Juicy Couture, Lucky Jeans and Kate Spade — and make them monobrand companies, and even though they were cutting costs elsewhere in the company, they would invest heavily in these three brands. Each brand had a ceo and head creative and was responsible for every decision from licensing, channel mix to international distribution. “I said in 2007, if any one of these three goes the way of Coach, we’ll have a win for our shareholders that will last for decades,” said McComb. He said the day he announced that the company would divest 20 of its 50 brands, “That’s probably where I got the most criticism. A lot of you thought, ‘This guy is nuts.’ But right then, we realized that we couldn’t do all the things that were implied with the collection of brands we had,” he said.
As for how big he believes Kate Spade can become, he replied $4 billion to $5 billion. “Clearly, we are in the earliest stages. One thing about transformation, it’s not a chapter in your company’s history, it’s an era. The true glory days of Liz Claiborne Inc. was when it was a monobrand. It was before it had all the little sidekicks and spin-outs. They controlled their brand with an iron first. That’s what we’re doing now with Kate.”