Is This Any Way To Run The Family Business?

On a warm evening in the summer of 1989, the normal bustle along Manhattan's upper Fifth Avenue turned into a buzz. The Dabah family was throwing a party in an apartment overlooking Central Park, and the guest of honor was none other than Yitzhak Shamir, then Prime Minister of Israel. As guests sipped cocktails and discussed U.S. support for Israel, secret service agents and New York City police stood guard along a roped-off sidewalk lined with limousines.

For the Dabahs, a proud family of Syrian Jews, the opportunity to fete Shamir was a rich honor. It also marked a coming of age. Not even a decade had passed since Haim Dabah, the oldest of four children, had begun to transform his father's struggling wholesale firm into a prosperous designer jeansmaker called Gitano Group Inc. Gitano's success had earned the Dabahs status and influence--enough to host a party for Israel's most powerful leader.

SIBLING RIVALRY. But three years later, "everybody thinks we're bums," laments Haim Dabah, Gitano's 41-year-old president. Earlier this year, Dabah shocked Wall Street by reporting a 1991 loss of $62.5 million on sales of $781 million. On July 31, he dropped a second bomb: a $78 million charge against second-quarter earnings. Pressured by its banks, Gitano has hired new management and launched a sweeping plan to close stores, shrink inventories, and jettison manufacturing plants. Meantime, a retailer of children's apparel the Dabahs bought in 1989--partly with money borrowed from Gitano--is having a liquidity crisis of its own.

The up-and-down saga of the Dabah clan shows just how quickly a loosely run family business can come unraveled under the pressure of spectacular growth. Gitano was plagued by a combustible mix of lax financial controls and a poorly executed expansion strategy--problems that should be fixed in the restructuring. But the company also has suffered from clashing wills within the family, something much less easily purged. Says a longtime executive who has left: "There's only one word for the downfall of Gitano: ego." As the company remakes itself, overcoming that problem may prove to be its greatest challenge.

In the 1980s, few apparel companies had brighter prospects than Gitano. Led by Haim Dabah and his younger brother Isaac, the company created a hot new brand of designer jeans with a chic, youthful image. But while designers such as Ralph Lauren and Calvin Klein sold their pricey fashions through big-name department stores, the Dabahs found a wide-open niche at blue-collar discounters such as Wal-Mart, Kmart, and Venture. As teenagers rushed to buy the low-priced goods, Gitano's sales shot from $30 million in 1980 to a peak of $807 million in 1990.

Gitano's success was a badge of honor for Haim and his siblings, who were born in Jerusalem. Their grandfather, also named Haim, had fled there in the 1940s to escape persecution. While most of the Dabah clan emigrated directly from Syria to New York, it wasn't until the mid-1960s, after the elder Haim died, that his son Morris began moving his family to America.

FAMILY TIES. Haim Dabah was 16 years old when he arrived in New York. The family had enough money to send him to Talmudical Academy of Baltimore, a boarding school. But after graduating, he went straight to work. He declined to join his father's wholesaling business, which sold everything from socks to umbrellas. Instead, he struck out on his own, hiring on at a New Jersey discounter called Big D, where he quickly rose from a stock boy to store manager.

By 1974, however, his father's business was struggling, and Dabah quit to help out. His father, a dapper man who speaks in a near-whisper, designated him "the face to the outside world," Haim says. The son proved masterful at using high-fashion ads to hone Gitano's young, sexy image. He also forged strong ties to discounters, especially fast-growing Wal-Mart.

By September, 1988, Gitano's star was burning brightly enough to command $20.50 a share in a $51.2 million initial public offering. The Dabahs retained a 70% stake. The money was used to pare Gitano's long-term debt, leaving the way clear for more expansion. "Everything we touched turned good," Dabah recalls. "I figured things would stay that way."

The trouble was, the company had outgrown Haim's ability to control it. There was no business plan, no budgeting, and no system to monitor the purchase and management of inventory. Admits Dabah: "The one thing I don't know how to do is make sure our systems, financial controls, and all that stuff work." When sales were booming, that didn't matter. But as the economy slowed in 1990 and Gitano became more dependent on low-margin business with Wal-Mart, the high costs of a loose organization began to show. Without the tools to gauge what was happening, Haim was lost in the clouds. "Imagine flying a plane without instruments," he says. "That's basically what happened."

Insiders say the problem was exacerbated by Haim and Isaac's dividing Gitano into what resembled sovereign fiefdoms. Although Haim had direct control of marketing and was ostensibly in charge of the entire company, it was understood that Isaac handled all production decisions. With sales growing, each brother wanted to expand his own division: Isaac wanted to bolster manufacturing while Haim was intent on expanding Gitano's retail business. The upshot was a series of disastrous decisions.

A `BLACK HOLE.' Isaac, for instance, steered Gitano into buying manufacturing plants in Mississippi, Guatemala, and Jamaica. But the company had no idea how to manage them. Last year, the Jamaica plant had a waste rate hovering at 20%--vs. an industry average of 4%. Workers simply threw out improperly dyed jeans instead of reworking them. Moreover, Gitano suffered what management now calls a "black hole" concerning piecework. With no systems in place to track apparel at various stages of the production process, thousands of dollars worth of merchandise would disappear. "I was fairly appalled," says Cliff Thompson, a Levi Strauss & Co. veteran brought in to clean up manufacturing. "It was a real mess."

Although manufacturing was losing millions--it contributed $15 million to Gitano's overall $62.5 million loss last year--Isaac held fast and wouldn't let go. "Nothing was ever put to a vote," grumbles one former top executive. "Everybody wanted to get out of manufacturing, except Isaac." It wasn't until late 1990 that he was convinced that the plants had to be shut down. Isaac was unavailable for comment. Haim would only say: "We feel strongly that the company should give executives a certain amount of autonomy. We don't try to micromanage."

Haim Dabah, too, had his unchecked follies. Retailing was the worst, insiders say. To get rid of excess inventory, he reasoned, Gitano should open its own stores. So he expanded headlong from 10 stores in 1987 to 100 last year. With a full staff of buyers and designers, the chain took on a life of its own, and soon there was no room on the shelves to accommodate inventories from the wholesale business--the strategy's original purpose. Old inventory built up and eventually had to be marked down to sell. The stores never made money.

Along the way, the Dabahs privately bought a 130-store retail chain called The Children's Place, partly with money borrowed from Gitano. The chain is a big customer of the public company but has never made money and is currently facing a liquidity crunch. "The family has lost a lot of money on Children's Place," Haim says, adding only that the $27 million still owed Gitano is collateralized by family assets.

Now, with Gitano stock languishing around 4, from a 1989 peak of 40, the Dabahs are conceding defeat. To straighten out the finances and build management controls, they've hired Peter C. Kells, a former Coca-Cola and Revlon exec. And as they renegotiate credit lines with banks, they've decided to get rid of two plants, shutter most of the stores, and refocus on the core: selling jeans to Wal-Mart and others. Kells, however, notes that even the core needs help. Gitano routinely orders too much inventory from its sources overseas, resulting in money-losing markdowns. The $78 million second-quarter writeoff reserves for such losses--even allowing for goods that won't arrive until fall. Kells is installing a budget system to rein in buyers. "I'm gonna be the major disciplinarian," he says.

But can Gitano really return to its heady past? Even if the Dabahs step aside and give Kells & Co. the power to pierce a corporate culture built on inefficiency, Gitano has other concerns. These days, the company sells more than one-quarter of its total volume to Wal-Mart. That guarantees some sales growth as the giant retailer continues to blanket the nation with new stores. But it also means razor-thin margins: Wal-Mart is infamous for squeezing its vendors for every penny.

WOES AHEAD. Evidence is also growing that Gitano's fashion sense--once considered fresh and progressive--is getting stale. Just ask Maxine Clark, the executive vice-president for apparel at Venture. Clark says her national chain has cut business with Gitano significantly over the past couple of seasons. The reason: "When we looked at the merchandise, we couldn't find anything to buy. The product line wasn't as fashionable as it should have been."

Kells points out that Gitano's orders for next season are up--proof, he says, that the brand is as strong as ever. And Haim Dabah is quick to show cynics a plaque on his desk that reads: "Business is a series of brilliant opportunities disguised as impossible situations." Maybe. But it's one thing to shrink a bloated jeansmaker to its right size, and another to keep family members from getting too big for their britches.

Before it's here, it's on the Bloomberg Terminal.