FRESH AIR AT LONDON FOG 2 new executives launch ad blitz, seek labor peace

THE BALTIMORE SUN

DARIEN, Conn. -- Over the last 10 years, James D. Milligan has established a reputation as a hard-nosed cost-buster, hired by Wall Street investors to ride herd on troubled companies -- cutting expenses, beefing up profits and then selling out to the highest bidder.

John Varvatos has a track record in the fashion industry of successfully refashioning product lines and revitalizing companies that live or die on consumer trends.

Now the investor-owners of London Fog Corp. have handed the two men another job -- rescuing the struggling raincoat and outerwear company left shellshocked by a frantic effort to reinvent it.

"There are too many weary, tired eyes," said Mr. Milligan, London Fog's new chief executive officer. "We going to have to settle down now and go to work."

Mr. Milligan and Mr. Varvatos, the new chairman, were named to the top jobs Aug. 23 after the ouster of the chairman and CEO of just a year, Arnold P. Cohen. Their immediate goal: to bring stability to a company widely perceived to be in crisis.

As part of achieving stability, the two say they are optimistic about discussions with the Amalgamated Clothing and Textile Workers Union to save at least some of the company's three Maryland manufacturing plants, which have 700 workers. Mr. Cohen had targeted the three plants for closing next month.

They have also launched a multimillion dollar advertising campaign to reintroduce London Fog products to an audience that was straying.

Most of all, the two men want to get London Fog's management and 2,700 employees -- of which 1,200 are in Maryland -- to begin working toward the same goal of creating a competitive and efficient company.

In an interview at London Fog's headquarters here, the two men indicated that the company's major investors -- GKH Partners and Merrill Lynch Capital Partners -- were upset by the pace, and in some cases the direction -- of changes Mr. Cohen was imposing, including ending the firm's role as a manufacturer.

In just one year, Mr. Cohen brought more changes to the company than it had seen in a decade. The company's headquarters was moved from Eldersburg to Darien, 100 management and sales personnel were eliminated, its Mexican factory was closed after just nine months in operation, three U.S. factories in Maryland and Virginia with 575 workers were shut down and the remaining three Maryland plants threatened with closure.

In the next month, Mr. Milligan and Mr. Varvatos plan to meet with workers in an effort to regain their confidence. They have also declared a moratorium on any more gut-wrenching changes.

"We have no further major organizational initiatives," Mr. Milligan said.

Under the new management structure, Mr. Milligan is in charge of financing and operations, while Mr. Varvatos concentrates on marketing and product design. The task they face is making the company consistently profitable so it can be spun off as a public company -- which would bring a lucrative return for its major investors.

That will involve bolstering the company's two main brands -- London Fog and Towne -- and then trying to extend the brands to related products through licensing and other joint arrangements, Mr. Milligan said.

This strategy is shared by Daniel W. Lufkin, a London Fog board member and a longtime financial backer of Mr. Milligan.

Ideally, Mr. Lufkin said, in five years London Fog will have "franchising and licensees in a number of related lines." There will be a range of brands from "Cadillac to Chevrolet," and the company will be international and its stock sold on the New York Stock Exchange.

And while he praised Mr. Cohen for his abilities, Mr. Lufkin said he was pushing too hard.

"Basically, this is a company that needs help," Mr. Lufkin said. "This is a company that is a delicate child that needs to be properly nurtured, properly cared for, properly brought along.

"You just can't just say, 'let's take it out and run 100-yard --es with it every day.' "

Of more immediate concern to employees, however, is the fate of their jobs.

After months of fitful negotiations with the union, the company in July announced that it planned to close plants in Baltimore, Hancock and Williamsport in October, although it retained the slim chance some compromise might be worked out.

That possibility now seems less remote.

Discussions continue

"Discussions continue and, frankly, it has been positive on both sides," said Mr. Milligan. "So we're optimistic that something can be concluded."

He added that, "we're pressing to get this thing resolved in the next two weeks."

More so than his predecessor, Mr. Milligan sees value in retaining a domestic manufacturing capability. Once that's given he said, it's difficult to get back.

"There's an advantage, and we're willing to take some pain as a result of preserving that advantage," he said. "So that's what really has gotten [the negotiations] back on the proper footing."

The company also has launched an ambitious advertising campaign aimed at distinguishing its traditional London Fog coats -- which cater to a more traditional, upscale customer -- from its Towne coats, which are supposed to appeal to a younger, hipper, more cost-conscious crowd.

To draw the difference between the two brands, London Fog advertisements are being run in magazines such as Vogue, Vanity Fair, The New Yorker and GQ, while the Towne ads appear in more mass-market publications such as People, Sports Illustrated, Rolling Stone and Redbook.

Some fall orders cut

But the company is also retaining a policy instituted by Mr. Cohen prohibiting retailers from discounting the higher-end London Fog brand. That change has meet stiff opposition in the retail community, with some chains cutting their fall orders.

"There's nothing that we didn't anticipate," Mr. Varvatos said. "Sometimes you have to take a step back to take a couple of steps forward."

This, along with other disruptions, has hurt the company's bottom line.

"We're dragging along the bottom," Mr. Milligan said. "But we certainly intend to mend that."

One of the company's largest financial problems is its huge debt of $160 million, which it inherited from the 1988 leveraged buyout the company from Interco Inc., a St. Louis-based conglomerate.

The interest on this debt and the competitive pressures on the company have helped drag down London Fog's earnings from $2.2 million for the fiscal year that ended Feb. 28, 1991, to a loss of $262,000 in the year ending Feb. 28, 1993 -- the latest date available for financial information about the privately held company.

To change the bottom line, the company turned to two men with vastly different backgrounds.

The son of a Illinois farm worker who had a sixth-grade education, Mr. Milligan, 54, didn't live in a house with indoor plumbing until he was 12. Beginning as a factory worker and union member at an Owens-Illinois Inc. glass plant, he put himself through college, becoming a certified public accountant.

He then climbed the corporate ladders at Price Waterhouse & Co. and Borden Inc. to become the right-hand man of the Wall Street elite, helping them play the bare-knuckles game of buying and selling companies.

Son of an accountant

Raised in the suburbs of Detroit, Mr. Varvatos, 40, is the son of an accountant with early aspirations to become a college science professor. But he started working in clothing stores at the age of 15, and by 25 he and other partners started their own high-end men's store in Grand Rapids, Mich.

He then worked for such companies as Cole Haan and Polo Ralph Lauren before helping to revitalize one of America's best-known fashion powerhouses -- Calvin Klein.

"I think we did a lot of things that positioned him [Calvin Klein] in the last year to refinance his business and relicense some of the products," Mr. Varvatos said.

Both men are veterans in the world of remaking companies, refashioning their products to entice consumers and boosting their profits to tantalize investors.

Mr. Milligan is a longtime ally of investors that make up GKH, particularly Mr. Lufkin -- founder of the investment banking firm of Donaldson, Lufkin & Jenrette Inc. -- who has used Mr. Milligan's services since the early 1980s.

"He has always been my partner," Mr. Milligan said about the two men's 14-year association. "He will be my partner for life, probably."

Besides Mr. Lufkin, GKH partners include Chicago's Jay and Tom Pritzker, chairman and president, respectively, of the Hyatt Corp., and Melvyn Klein, an attorney and private investor in Texas. GKH, which was capitalized with $550 million in 1988, also has 22 institutional investors and interests in nine companies ranging from Savoy Pictures Entertainment Inc. to USG Corp., the giant gypsum company.

GKH obtains stake

GKH obtained a 36 percent stake in April as a result of a merger between London Fog and Seattle-based Pacific Trail Inc., which GKH acquired in January 1993. Another 47 percent of London Fog is held by Merrill Lynch Capital Partners, 11 percent by Merrill Lynch & Co. Inc. and the remaining 6 percent by managers.

Soon after GKH came into the picture, Mr. Milligan was appointed chairman of the board of directors' executive committee -- where he oversaw the activities of Mr. Cohen.

But people associated with both Merrill Lynch Capital and GKH say Mr. Milligan's appointment was a mutual decision by the two major shareholders.

"It was our collective judgment that he ought to become chairman of the executive committee," said Robert E. End, a partner in First Capital Partners, the company that oversees Merrill Lynch Capital's investment.

But it isn't untypical for Mr. Milligan to take charge of a project in which Mr. Lufkin is involved, said Pierson M. Grieve.

He should know.

Mr. Grieve was replaced by Mr. Milligan as president of Questor Corp., a conglomerate that made Spalding sports equipment and Evenflo infant products, in 1981 shortly after a group headed by Mr. Lufkin was welcomed in as a needed investor.

"They want their own man who has some very fixed ways of doing business," said Mr. Grieve, who now heads Ecolab Inc. "Obviously, Milligan fits the Lufkin way of doing business."

And that, say some, means increasing a company's value as quickly as possible, then getting out.

"They have short-term horizons," said a former executive of a company that was taken over by Mr. Milligan and by some of the same investors now at London Fog.

"They aren't in there . . . because they want to make all the employees rich or to build a franchise that will rival anything in the Western world," he said. "They are in there to make money. The faster they make the money and get out of there, the happier they will be."

In the case of Questor, Mr. Milligan and Mr. Lufkin, as chairman, took the company private within a year, paying shareholders a premium over the market price -- and sold the resulting Spalding & Evenflo Cos. four years later to a Venezuelan family for $400 million -- a hefty profit over the roughly $130 million they had invested.

But others, including Mr. Lufkin, say Mr. Milligan tries to build up companies even if some cutting is initially required.

Golf ball plant is example

Mr. Lufkin said a Spalding golf ball plant in Chippewa, Mass., is an example of Mr. Milligan's cut-and-rebuild approach.

"He had to streamline the plant and be in line with the money that was coming in," he said. "And when we ended up, which was three years later, [the plant] was larger than it ever was, the plant was redesigned and efficient."

Paul L. Whiting, current president and chief operating officer of Spalding & Evenflo Cos. Inc., said Mr. Milligan took over a highly leveraged, unfocused and marginally profitable Questor company and turned it into a virtually debt-free, highly profitable operation.

"The business has more than doubled in sales and profitability during the last 10 years, using many of the same strategies and disciplines employed by Mr. Milligan. Why not? They work well," he said.

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