Huge CEO Gaffes: Talbots
Jul 6th 2012 10:56AM
Updated Jul 6th 2012 3:14PM
This year, I introduced a weekly series called "CEO Gaffes." Having come across more than a handful of questionable executive decisions last year when compiling my list of the worst CEOs of 2011, I thought it could be a learning experience for all of us if I pointed out apparent gaffes as they occur. Trusting your investments begins with trusting the leadership at the top -- and with leaders like these on your side, sometimes you don't need enemies!
Right now, I plan to highlight Trudy Sullivan, CEO of mature women's apparel retailer Talbots (NYS: TLB) .
The dunce cap
Before we begin, I'll advise grabbing a stress ball, something to bite into, and perhaps a stiff drink, because this week's choice is absolutely epic and a prime candidate for gaffe of the year.
Talbots has been struggling for years. A combination of not understanding what its customers want, high inventory levels, and expanding its store count beyond its means (e.g., purchasing J. Jill) left the company considerably exposed to the recession a few years back.
Following the recession, it was in a similar boat as that of department-store giants Macy's (NYS: M) and Dillard's (NYS: DDS) as well as women's apparel peers Chico's (NYS: CHS) and Ann (NYS: ANN) . But unlike Talbots, the other four have rebounded from their lows. Macy's and Dillard's have gained customers from the struggling J.C. Penney and Sears Holdings while using consistent pricing and loyalty rewards to retain customers. Chico's recently boosted its full-year sales guidance on the back of a 9.6% rise in combined comparable-store sales, proving it has the right merchandise for its customers. Ann has achieved success by reducing promotional activity and driving up margins in its LOFT brand.
Talbots, on the other hand, has been struggling to return to profitability. It's closed about 70 underperforming stores over the past year and has had only one profitable year since 2007. Facing the grim reality that Talbots would either need to keep shutting stores or face a takeover, the company began shopping itself around late last year.
Surprisingly, Talbots, despite all of its struggles, did receive an offer in the form of a $3 per-share takeover bid from private-equity firm Sycamore Partners in December. Talbots, however, would have none of it and quickly rejected the bid as inadequate and undervaluing the company. But after walking away from the deal, the company once again warmed up to Sycamore in early May with the private-equity firm purportedly willing to offer about $3.05 per share for the company. In true hope-killing fashion, these talks also broke down.
Now here's where things went from bad to just plain stupid.
On May 31, after months of back-and-forth negotiating, Talbots finally agreed to a private buyout from Sycamore for... drumroll, please... $2.75 per share. That's right, in true George Costanza fashion, they held out for less money!
To the corner, Ms. Sullivan
But wait -- there's more!
There's actually a lot more! Not only did Trudy Sullivan hold out for almost 10% less than what Sycamore Partners had originally offered, but she had this to say about the deal: "We are pleased with the value this transaction delivers to our stockholders and believe that this is a positive development for all of our stakeholders."
Say what? If I were a shareholder and I had a choice between a sharp stick in my eye and accepting an offer of $2.75 after $3.05 was possibly on the table from the same firm, I'd have to do some serious thinking. I can't help but be completely mortified by Sullivan's choice of words. Since she took over the CEO position on August 1, 2007, Talbots' share price has lost 88%, annual sales have tumbled by 36% (when excluding its J. Jill stores), and the company has eked out a profit in only one of the five fiscal years. Maybe I'm missing something here, but where exactly is the value in this transaction that Ms. Sullivan orchestrated? To me, it's one of the worst hack jobs I can recall.
But things get even worse!
In 2011 Sullivan signaled her intentions of stepping down as CEO of the company (to thunderous applause from shareholders, may I add), but stands to collect a gigantic golden parachute if this reduced buyout goes through. Her entire executive committee stands to net $16 million in compensation tied to Sycamore's purchase, with Sullivan herself netting $6.2 million. Aren't you glad I told you to grab that stress ball now?
Ridiculous payouts really shouldn't come as a surprise, as Sullivan has received them throughout much of her tenure as Talbots' CEO. In 2008 she received a $1.2 million boost in her pay package because her retirement benefits were reduced -- all while the company froze its pension plan, suspended its quarterly dividend, and laid off 370 workers. Between 2007 and 2010 Sullivan received $26.9 million in total compensation with the prospect of receiving a $5 million severance package (announced last year) and the $6.2 million she stands to gain from the buyout.
Sullivan truly brings CEO gaffes to a new level, and the only saving grace for shareholders worldwide is that soon she'll be gone. We can only hope no one rehires her into an executive leadership position down the road. My fingers are crossed!
Do you have a CEO whom you'd like to nominate for this dubious honor? Shoot me an email and a one- or two-sentence description of why your choice deserves the next nomination, and you just may wind up seeing your nominee in the spotlight.
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At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He is merciless when it comes to poking fun at dubious CEO antics. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Dillard's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's always looking out for your best interests.
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