New boss claims to have rejuvenated mail order giant Lillian Vernon

Michael D. Muoio expects Lillian Vernon Corp. to return to profitability in the upcoming fiscal year after several years of losses. (Bill Tiernan / The Virginian-Pilot)

The Virginian-Pilot

VIRGINIA BEACH — When Michael D. Muoio arrived in June to lead Lillian Vernon Corp., he was taking control of a retail icon that had fallen on hard times.

“We were on the verge of absolute collapse in terms of bankruptcy and closure six months ago,” Muoio said this month, adding that the company “would have been gone.”

Several days later, he described those statements as a bit of “hyperbole.”

Still, Muoio made it clear that problems abounded at the catalog retailer, which he said had lost about $25 million for each of the last three years, an amount he described as being “unsustainable.” Its value-priced gadgets, gifts and household goods weren’t selling well with the company’s core middle-age, middle-income customers. The distribution center was struggling to get orders out the door. And most calls to the company’s call center were for customer service, not to place orders, he said.

In the past six months, Muoio and his lieutenants have changed every facet of the 55-year-old company, from merchandise selection to how orders are taken to how the company’s signature personalization service is carried out . He called it a “major league reorganization.”

One of their first decisions was moving the retailer’s headquarters from White Plains, N.Y., outside of New York City, to the company’s longtime distribution center off Lynnhaven Parkway in Virginia Beach.

The result looks to be one of the company’s best holiday seasons.

“It was pulled out of the fire, make no mistake about it,” Muoio said. “We were a troubled company, big time. We still have our challenges, but you can just see it in the performance that we are coming out of that abyss.”

Company founder Lillian Vernon herself approves of the company’s new direction. She said the leadership knows how to run the business, properly price items and has hired back many veteran company managers.

“These people really care about the business – it’s not an ego trip,” Vernon, the company’s chairman emeritus, said of Muoio and his team. “They care about what’s going to happen to the company. And they’re going to make a difference.”

Vernon started her namesake in 1951 at her kitchen table in Mount Vernon, N.Y., using $2,000 in wedding gift money to buy leather purses and belts and sell them personalized through an ad in Seventeen magazine. The $495 ad generated $32,000 in sales, launching her business. She is now in her late 70s and has regained an active role in the business, reviewing every catalog before printing, going over every item and every price.

Muoio said he pledged to restore the business for Vernon.

“I told her the day I joined the company that every fiber in my brain and in my body is dedicated to getting her name back to the iconic status that it deserves,” he said. “Those were the right words. I think that brought a tear to her eye.”

The retailer has had three owners since 2003. The latest change of hands occurred in May, when Sun Capital Partners Inc., a privately held Boca Raton, Fla.-based investment company, bought Lillian Vernon from Direct Holdings Worldwide Inc., a holding company created by Ripplewood Holdings LLC and ZelnickMedia Corp., both of New York.

Muoio was appointed president and chief executive, after leading rival direct retailer Miles Kimball for 14 years, leaving in 2005 after growing the Oshkosh, Wis.-based firm’s annual revenue from $50 million to $200 million. Sun Capital previously owned Miles Kimball.

Terms of the Lillian Vernon deal between the privately held companies were not announced at the time of sale. However, Muoio said Sun Capital paid about $10 million in cash for Lillian Vernon, a price that he said reflected the company’s poor condition. The transaction included additional elements that Muoio said he didn’t know the value of, among them the contract to handle call-center and distribution services for the Time-Life music and video retail business, work Lillian Vernon has done since 2004.

In 2003, Direct Holdings paid $60.5 million in cash for Lillian Vernon, which was then publicly traded.

Strauss Zelnick, the founder of ZelnickMedia, said Lillian Vernon lost money while owned by Direct Holdings but that the losses were far from the $25 million per year cited by Muoio, though he declined to disclose those amounts. He also said the $10 million sale amount is “grossly inaccurate.”

“It is accurate to say when they purchased the company from us it was still losing money although vastly less than what it was losing prior to our management,” said Zelnick, the former chief executive of BMG Entertainment. “We are very proud of the work we did at Lillian Vernon, but we didn’t get it all the way there.”

Zelnick said Direct Holdings , which owns Time-Life , sold Lillian Vernon once it realized it didn’t have enough retail expertise to maximize the investment it made.

“We did the very best we could with it,” he said.

A spokesman for Ripplewood, a large private equity firm that led the group that purchased Reader’s Digest last month, said the company would not comment on its past ownership. Rick Bennet, Direct Holdings’ CEO, would only say, “I’m no longer associated with the company.”

As a public company, Lillian Vernon last posted a profit in 2000 of $6.3 million, according to a filing with the Securities and Exchange Commission. It recorded losses for the following three years, reaching a low of $18.6 million in 2003. Revenue slid as well, falling from a five-year peak of $296.4 million in 1999 to $238 million in 2003.

Now, the retailer’s annual revenue is about $175 million, Muoio said. Half of its sales come via the Internet and the rest from telephone orders, both originating from the many catalogs sent out by the company – 80 million this year. In the fiscal year ending June 30, Muoio expects the company to lose $4 million to $6 million before taxes, depreciation and amortization, with the company returning to profitability the following year.

Christopher T. Metz, a managing director with Sun Capital, said he’s “very pleased” with his company’s acquisition of Lillian Vernon, saying it’s a great company with a great brand name.

Sun Capital typically holds companies for five years before selling them, he said. It uses that time to restructure the businesses and make them the strongest in their industries. Sun Capital has major investments in 63 companies, including Bruegger’s bagel bakeries and GMAC Financial Services. Last month, it announced plans to buy the retailer Eddie Bauer with another company.

To turn Lillian Vernon around, Muoio has focused on the fundamentals of the business: merchandising, operations and customer service.

He brought back free personalization, which Muoio said the company, under Direct Holdings, had recently been charging for after decades of not doing so. This popular service, a company hallmark, allows customers to have names or initials etched, sewn, laser engraved or otherwise fixed to its products. He dropped prices 10 percent across the catalog to counter a recent increase.

He cut back on the number of products offered this year, from 2,100 last holiday season to about 1,500 currently, to reduce inventory and make order fulfillment easier. Higher-priced and slower-selling items were cut, said Michelle K. Gershkovich, Lillian Vernon’s executive vice president of merchandising and planning.

And Muoio embarked the company on a new, “back-to-basics” merchandising strategy. That means focusing on top-selling products from the company’s best years, in the late 1990s, such as personalized Christmas stockings and ornaments, Gershkovich said. The company was more “fashion-oriented” in the last few years, selling more items like handbags, she said.

“We really kind of lost our way in terms of merchandising – it really wasn’t necessarily what our customers were looking for,” she said. “By going back to what was successful, that’s really what’s reinvigorating Lillian Vernon.”

Muoio said he has brought order to the company, which he said had been “frenetic” upon his arrival, when “everything was a surprise.” He’s replaced it with a transparent style of management that allows the workers to better understand the company’s goals and challenges. He said he has no problem sharing any business information with employees, except for some personnel issues.

“There were so many good people here within the organization but the failure of strategy and the failure to execute was rampant,” Muoio said. “The one thing I think I brought to the party was clarity and turning on the lights. I just sort of lit up what was going on.

“People didn’t feel good about coming to work in the morning, I don’t think, but I think they do now.”

Muoio said he expects the rejuvenated and better-performing Lillian Vernon to gain back market share from its main competitor, Collections Etc. Inc., based near Chicago. “They’ve been eating our lunch in front of us for the last three years,” he said.

Michael I. Grant, a managing director for the Winterberry Group, a New York-based strategic consulting firm that works with direct retailers, said he expects Lillian Vernon to thrive under Muoio because of his success at Miles Kimball.

Miles Kimball and Lillian Vernon sell similar types of products in similar ways to similar people, so that success should translate, he said.

“He’s really the right guy” for Lillian Vernon, said Grant, who worked with Lillian Vernon while it was owned by Direct Holdings.

Moving the company’s headquarters from White Plains to its nearly 1 million-square-foot Virginia Beach distribution and call center helped propel the company forward, Muoio said. It reduced about $9 million in annual expenses and encouraged better cooperation among employees.

Lillian Vernon had about 120 employees in New York, such as merchandise buyers and finance and operations staff. Of the 45 jobs that moved to Virginia Beach, 15 were filled by Lillian Vernon employees who transferred and the rest were mostly filled with local hires, Muoio said.

“We really work as one collaborative team now,” he said, “where in the past it was 'Oh, it was the distribution center in this foreign land.’ ”

The company will maintain a small “satellite” office near White Plains to house five to six members of a team, including Vernon, dedicated to scouting new products, Muoio said.

The company received financial incentives from Virginia Beach for the move. Last week, the Virginia Beach Development Authority approved a $100,000 grant to assist Lillian Vernon with employee training costs, said Robert Ruhl, the city’s business development and marketing manager.

Additionally, the Virginia Department of Business Assistance has agreed to provide nearly $30,000 for worker training, department spokeswoman Carolyn Conlon said.

Metz, the Sun Capital executive, has high hopes for Lillian Vernon, forecasting that its revenue might grow to between $250 million and $300 million in the next five years.

“We have a very nice company that we’re going to make even better,” Metz said.

Reach Gregory Richards at (757) 446-2599 or gregory.richards@pilotonline.com.