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TROUBLE STALKS THE AISLES AT ANN TAYLOR
Old-timers on Wall Street surely can recall an initial public offering that plunged into crisis quicker. But it'll be a long time before investors forget the speedy descent Ann Taylor Inc. has suffered since its IPO last May (chart). It may be a while, too, before they forgive Merrill Lynch & Co. for underwriting the shares, now worth half the $26 they commanded in the IPO.
Like some freeway accident on a foggy day, the pileup at the upscale retailer of women's clothing makes a gruesome spectacle. Force yourself to look:
In August, Ann Taylor disclosed that same-store sales were tailing off. That alone is pretty ugly for a company that went public just weeks earlier, but there's more. In October, Thomas H. K. Brooks, president and son of Chief Executive Joseph E. Brooks, unexpectedly quit. Weeks later, Joe Brooks himself walked out, just ahead of a report that his son had been detained by the U. S. Customs Service at John F. Kennedy International Airport, allegedly for smuggling a clutch of watches. For good measure, Vice-Chairman Gerald H. Blum up and quit, too, to pursue an acting career.
So who's minding the store? A spokeswoman says a headhunter is searching for a new CEO. Meantime, Ann Taylor is running by committee -- a reality that has investors on edge and selling out. "The business has really hit a wall," says Helen Hayes, an analyst at Janus Venture Fund, which bought a big stake in the IPO and recently dumped it at a loss. "The resignation of Joe Brooks couldn't have come at a worse time."
LIKE A WINNER. Neither Brooks is talking. But James J. Burke Jr., chief of Merrill Lynch Capital Partners and an Ann Taylor director, says his firm isn't fretting over its majority stake in the retailer: "We have every confidence in our Ann Taylor investment." Indeed, Merrill's tie to Brooks has long looked like a winner. With Merrill's backing, Joseph Brooks led a $430 million deal for Ann Taylor in 1989. Brooks became chief and named his son president. They drafted a plan to expand Ann Taylor from 177 stores in April, 1991, to 250 by 1993. Thirty-three new stores opened this year, and 42 were to open in 1992. With the expansion on track, Ann Taylor seemed headed for fast growth when it went public in May. Suddenly last summer, a slew of merchandising blunders hit home. Noting that his core clientele of affluent working women was shrinking, Brooks had decided to appeal to a broader group. Analysts say he cut the quality of some goods and phased out Ann Taylor's relationship with the expensive line of Joan & David shoes.
The plan backfired. For one thing, there already are lots of shops appealing to the broader clientele. For another, Ann Taylor's reliable customers balked. Here's one example: The company had "bought a lot of rayon, and it wasn't a high-quality fabric," says Janet Joseph Kloppenburg, an analyst at Robertson, Stephens & Co., a co-underwriter of the IPO. "Customers felt the high prices of the garments weren't warranted."
'LESS TRAFFIC.' Or take the move to dump Joan & David. Private-label shoes have fattened company margins. But, notes Richard Hastings, a credit analyst at Solo Credit Corp., "the Joan & David exit means less foot traffic in the stores." Although Ann Taylor's sales per square foot have been among the highest in retailing--$740 vs. $450 at The Gap Inc.--volume is off: Same-store sales fell 5.2% in October.
All this might leave an underwriter red-faced, but Merrill is having none of it. "We did everything in terms of doing right by all our constituents, our shareholders and creditors," says Burke. But since Merrill Lynch Capital Partners first invested in the company back in 1989, it picked up its stake, now 56%, at $6.80 a share. So it's still ahead of the game. Says Burke: "There is absolutely no financial impact on Merrill."
The Brookses may not get off so easy. A source at the company confirms that Ann Taylor has hired law firm Skadden, Arps, Slate, Meagher & Flom to investigate the Brookses' business practices. For instance, he says, some personal expenses authorized by the younger Brooks may have been put on the retailer's tab. Says this source: "We are still looking into Joe now." Expenses improperly charged to the company, he says, will have to be reimbursed by the Brookses.
And then there are those watches. Customs Service Regional Counsel Melvyn N. Minsky confirms that the feds are weighing a possible civil case against Tom Brooks.Laura Zinn, with Michele Galen and Leah Nathans Spiro, in New York