Did Leslie Wexner Take His Eye Off The Ball?

Retailing savant Leslie H. Wexner isn't the type to wax sentimental--even about the most sentimental of things. "Marriage?" he says. "I was kind of neutral about it. I figured if you meet someone and you fall in love, you get married. If you don't, you don't." Well, he did. In January, the 55-year-old chairman of The Limited Inc. married 31-year-old Abigail S. Koppel, a corporate attorney at Davis Polk & Wardwell. She has since given up her job at the prestigious New York law firm and now the two are talking kids.

Les Wexner is nesting. If ever there was a sign that the '80s are long gone, this is it. Of course, Wexner has embraced the current decade in his own inimitable style: The erstwhile bachelor billionaire didn't just buy a house for his new bride, he built a small town outside of Columbus, Ohio, and nestled into a 60,000-square-foot mansion.

Shareholders, however, are hoping that Wexner's newfound interest in hearth and home will translate into a renewed devotion to The Limited. The $7 billion retailing powerhouse is suffering a bad case of 1980s hangover. Its stock has stalled at 1987 levels. The company's two largest divisions--the flagship Limited Stores and Lerner New York--have lost direction and profits. "Our business hasn't been good for years," concedes Limited Stores President Howard Gross. "Hell, yeah, I'm feeling pressure." As for Victoria's Secret Stores, the once hot lingerie chain is plagued by persistent quality problems.

MEA CULPA. The recession certainly hasn't helped. But many analysts and former employees lay the blame at Wexner's feet. While his core units deteriorated, they contend, the chairman focused on smaller, more promising businesses. He became distracted by outside pursuits ranging from real estate to board memberships to designing interiors for his own and friends' homes. When he was around, former employees say, his mercurial, peripatetic presence served to rankle, not help. And after several key defections and firings, management ranks are thin. "Look at the results," says a former top executive. "They're lousy. I still own Limited stock, and I'm very angry with him."

Wexner, who denies taking his eye off the ball, insists that he's fully engaged in the company. Programs are under way to shore up management, stores are being "right-sized," and quality problems are being addressed. Still, during a rare interview at The Limited's Columbus headquarters, Wexner offered a mild mea culpa. "I have been very busy doing a lot of things," he says. "As for being disappointed in Limited and Lerner's results, yeah, I am."

Wexner seems to have convinced Wall Street's retail analysts that he has the situation under control. Most are predicting sales will approach $8 billion this year, up from $6.9 billion in 1992. Operating earnings, they think, could top $1 billion, up from $789 million last year. But first-quarter results, which came out May 11, fell short of Wall Street's estimates. Sales were up only 7.3%, compared with predictions topping 10%. Net income dropped 14% instead of rising 7%. Worse yet, same-store sales dropped roughly 5% at Victoria's Secret and at least 10% at Limited Stores and Lerner.

Now that he's back, the question is whether Wexner has a coherent strategy to turn around his core businesses. The Limited's growth lately has come largely from its Express Inc. division--a young women's apparel chain that became the largest producer of sales and earnings last year--and a slew of fast-growing startups. Most of those businesses are run by Michael Weiss, a widely renowned merchant who has been at the company for 12 years.

By contrast, Wexner has lost his best people at Limited Stores, Lerner, and Victoria's Secret. Since 1990, both Verna Gibson, president of Limited Stores, and Robert Grayson, head of Lerner, have departed. Wexner replaced Gibson--who steered Limited Stores for six years--with Howard Gross, who had successfully run Victoria's Secret. The result: Both divisions have suffered. Gross hadn't sold women's apparel for eight years and needs to find a strategy that works. His buying team is in turmoil. In April, four of his top buyers resigned. Another left to join Ann Taylor Stores.

The management unrest comes at an especially bad time. Over the past several years, former insiders say, the strategy that wove together The Limited's growth in the 1980s has begun to unravel. The problem: Its stores and catalogs--long on glitz and image--have sold apparel short on quality. That was fine during The Limited's boom days, when it ran circles around department stores with flashy, up-to-date mall shops. But Gross admits that as his core "twenty-something" customer moved into her 30s, she balked at pants with no linings and plastic buttons that popped off.

Trouble is, the company's traditionally rich margins were based on that formula. And as customers began to sour on paying up for such clothing, markdowns of merchandise at Limited Stores and Lerner ate into profits. UBS Securities Inc. analyst Todd Slater estimates that in 1989, the two chains together generated roughly $2 billion in sales and $313 million in operating profits--more than half the company's total earnings. By last year, their combined profits had fallen to $161 million.

All the while, Wexner has been busy doing other things. Much of his time at work--probably too much, he admits--has been spent developing what he calls the "baby" businesses: smaller specialty retailers he hopes will grow into giants. So far, the babies have been precocious. Bath & Body Works, a chain of Body Shop Inc. knockoffs that sell fragrances and soaps, should earn $13 million this year on $105 million in sales. And Structure, a 330-store chain that sells moderately priced, Armani-inspired men's clothes, should pocket $63 million on $455 million in sales.

For all their success, though, those chains made up just 5.5% of total sales in 1992. And other units have their own problems. Neither Abercrombie & Fitch, a preppy men's apparel chain, nor Henri Bendel, a set of four tony women's apparel stores, is profitable. Improving quality at Victoria's Secret has pinched margins there.

COUNTRY HOUSE. Although he is loath to admit his stores stocked shoddy merchandise, Wexner describes the environment into which he was selling this way: "In the '70s and '80s, the mentality of America was that everything was disposable. The notion of quality wasn't important." The '90s are different: Value is king. Critics say that as the market turned--rendering The Limited's key units out-of-step--Wexner was distracted.

Wexner bought companies that he himself describes as "flat out losers." He launched several takeover attempts of such department-store chains as Carter Hawley Hale Stores Inc. and Marshall Field & Co. Meanwhile, he began assembling an art collection studded with Picassos and de Koonings, bought mansions in Palm Beach, Fla., and Aspen, Colo., took cruises on his yacht, The Limitless, and made a hobby out of redecorating homes. Wexner sits on the boards of Sotheby's and Banc One Ohio Corp. and donated $25 million for the Wexner Center for the Arts at Ohio State University, his alma mater.

Perhaps his most spectacular diversion is the sprawling "town" he is building in New Albany, Ohio--a once sleepy hamlet 12 miles north of Columbus. Starting in 1987, Wexner bought thousands of acres for a development including hundreds of homes, sewer infrastructure, a school, and a country club. "I wanted to build a house in the country," he says. "But there's no sense in having a trailer park across the street."

One former Lane Bryant executive says Wexner was visibly absent. He stopped coming to regular Lane Bryant Monday meetings, for instance, and only periodically visited the division. "If you're going to get involved in decision-making," this executive says, "you have to get a little closer to it than dropping in every couple of months and delivering yourself from on high."

FOCUS. Ironically, when Wexner became involved, he was unusually demanding. Impatient and volatile, he insisted on long hours and didn't understand outside demands, such as family. "Life at The Limited becomes monastic," says another former employee. "It becomes an intrusion on your personal life."

Wexner declined to comment on that, but he denies being distracted by all the extracurricular activities. "I don't think most analysts understand that whether I work a 70-hour week or an 80-hour week, I take my head with me when I go home," he says. But he's also intent on convincing his critics that The Limited's problems are receiving his full attention. "All I've got to do is focus on executing," he says.

So far, that has meant prodding the trouble divisions to hone their merchandising strategies. Wexner has also involved himself in upgrading quality. Gross says Wexner has made buying trips to Hong Kong, where he has O.K.'d orders of clothing made from more expensive linens and silks. "I think we've made tremendous progress in quality," says Gross. "So why aren't we seeing the results? We were kind of naive about how long it would take."

But others, including institutional shareholder David Gilson of IDS Financial Corp., think The Limited still needs to tune its fashion antenna. And Wexner admits he has a people problem. Growth of other divisions, Wexner says, robbed executives from Limited Stores who weren't replaced. "In perfect hindsight I think we neglected [Limited Stores] and cannibalized it." Now, he has assigned human resources director Arnie Kanarick to help Gross find better merchants. "It's clear we've not done a great job of identifying and nurturing talent," Kanarick says.

Finding good people is no easy task. Devising a strategy to reposition The Limited for the '90s will be even tougher. Can a refocused Wexner pull it off? "Entrepreneurs, guys that start businesses, grow with them," Wexner says. "It's more painful than it would appear."

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