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CEO Chronicles

Legget & Platt CEO Dave Haffner and The Limited’s Linda Heasley discuss the challenges and opportunities of leadership

Divesting Discipline

Laying off his brother may not have been the most difficult decision Dave Haffner had to make as CEO of the car-seat part and home-furniture component manufacturer Leggett & Platt, but it was one of the most emotional. "I'd asked my team to go out and find people who were close to retirement and places where we could reduce our labor costs," he recalls. "And lo and behold, when they came back, one of the names on the list was my brother."

After agonizing, Haffner decided two things: First, that no one could be immune to the retrenchment, and second, that he would be the one to tell his brother, a plant supervisor with the company for 41 years. "In the end it worked out all right because he had significantly invested in company stock," he says. "He said, 'Look, don't worry about me, worry about that total shareholder return. You take care of that and everything will be fine.'"

Given the depressed state of the markets on which Leggett's fortunes depend, that was a challenging request. Demand for the engineered components of residential and office furniture that the Carthage, Mo.-based company designs and produces slumped precipitously in 2008, and remain depressed today. But the company moved swiftly to adapt to this new environment, first scaling back production and then resorting to layoffs and plant closures. Since the end of 2007, Leggett has cut about 5,000 jobs, bringing its workforce down to approximately 19,000.

The company also benefited from divestitures set in motion long before the downturn hit, notes Haffner, who launched a program to cut under performing divisions loose shortly after he was named CEO in 2006. "For years and years, we had been what I call a hunter and gatherer of companies," he explains. "We made many, many acquisitions and had never disposed of any."

Its newly minted CEO set out to change that.

At the time, the company held nearly 30 business units and more than 150 manufacturing sites. Working with consultants, Leggett began an arduous process of evaluating the value that each unit would provide shareholders over the long haul, eventually identifying seven laggards that should be traded or sold. Five of the units were sold—for more than $400 million total—in 2008.

Among them was the aluminum segment Haffner had run for 13 years "That was difficult for me, because I had a lot of close personal friends there," he says, noting that the deal's timing proved fortunate. "We announced the transaction in November of 2007 and closed on it in July of 2008; less than 90 days later deals of that size would never have been syndicated."

The series of divestitures dramatically changed the company's size, dropping revenues from $5 billion in 2007 to $4 billion in 2008. Revenues dropped another 25 percent in 2009, but EBIT margins rose by 180 basis points, says Haffner, whose finesse at cutting is reflected by a personal hobby of creating customized knives. "We excused ourselves from businesses that had a too low of a contribution margin. And we put some very focused energy on reducing fixed costs, product development and pricing discipline. If there was ever a good time to reduce your fixed costs, it's been in the last 18 months or so."

Leggett’s markets are now showing signs of recovery. In 2010, sales of home furniture components have risen by a high single-digit percentage, and sales of car-seat parts are also rising with the rebound of the auto industry. The company's prospects are also on the rise. Sales hit $816 million inQ1 2010, an increase of 14 percent over the first quarter of 2009, and the company expects earnings per share of between $.95 and $1.30 for 2010.

Haffner is cautiously optimistic that markets will continue to improve. "Things have been challenging, very challenging, in the consumer durables industries we participate in," he says. "But they're getting better."

Leveraging the Limited

Tapped to run The Limited Stores in 2007, Linda Heasley initially demurred. At the time, the brand hadn't been profitable for more than a decade and parent company Limited Brands had been steadily shuttering locations and siphoning resources into its other retail brands—Victoria's Secret and Bath & Body Works.

"My argument was, 'If The Limited closed tomorrow, who would care?'" recalls Heasley. Still, when pressed by COO Len Schlesinger and VP and CAO Martyn Redgrave to reconsider, she spent a month taking a closer look and soon spotted a "right space" opportunity. "Nobody was addressing the needs of the 25- to-35-year-old working woman."

Heasley took the post of president and set out to change that. While she didn't know it at the time, The Limited was being prepped for sale. But the timing of the acquisition—which came six months into her effort to examine every component of the business and identify areas for improvement—and the acquiring company—private investment group Sun Capital, which bought 75 percent of The Limited— couldn't have been better.

"Sun has a jumpstart process for acquired companies where they take the first 90 days to kick every tire and figure out what needs to be fixed and where the opportunities are," reports Heasley. "We had already started doing that work, so after the acquisition we were given full license to move very quickly."

Central to Heasley's program was an overhaul of the company's apparel products, which were stylish and well-made, but priced too high for its core customer. The young career women shopping at The Limited simply didn't want to plunk down $98 for a silk blouse, no matter how beautifully cut and detailed it might be. Moving merchandise meant marking it down, which, in turn, meant narrowing already slim margins.

"When I came in, we had a lot of choices on the floor and almost half of them were on sale at any given point," saysHeasley.To help both herself and her employees home in on what their target customers really did want, Heasley decided to create one. Launched in 2007, Tyler Monroe— prototypical Limited shopper—became a touchpoint for decisions at every level of the organization. How would Tyler dress for the office? For the weekend? Would she respond to this marketing campaign? What appointments would be in her day planner? Over the years, research has refined The Limited's knowledge about Monroe. "She cares about where her money goes and has causes she's passionate about," reports Heasley. "She's very well educated and increasingly digital—a very modern woman."

Like its customers, The Limited is also going increasingly digital. It launched a Facebook fan page in 2009, ran a viral marketing campaign where customers competed to win a buying spree at The Limited by assembling the perfect outfit online and is aggressively building its e-commerce business. "We know from research that the multichannel customer spends twice as much as customers who only shop in stores and four times what a customer does who only shops online," says Heasley. "So we want to make how she interfaces with us seamless. If you're in a store and we don't have your size, we'll order it for you online and ship it for free."

Along with refining styles and marketing efforts the better to suit the Tyler Monroes of the world, Heasley focused on reducing costs. Some unprofitable stores were closed while others were remodeled or downsized. "Our average store was about 7,000 square feet; we're now getting more toward 5,000," says Heasley. She also streamlined selection to make the assortment less "overwhelming" for customers. "We've dramatically reduced the choices on the floor, which makes it easier to display the styles effectively— and ultimately easier to shop."

The effort has paid off. In 2009, the Limited logged a profit for the first time in 17 years, and same-store sales growth has accelerated from positive low single digits inQ4 2009 to positive double digits inQ1 2010. At the same time,margin rates have continued to improve, reports Heasley. "Given these top-line and margin trends, along with continued tight expense control, first quarter EBITDA was more than double our budget and seven times last year's profitability," she says.

Still, there's plenty of room for improvement. The Limited's store count is 225, down from about 250 in 2007 and a mere fraction of the 750 locations it once boasted. But Heasley is back in expansion mode. "We are in the process of opening 10 this year and the goal is to get to about 15 to 20 a year going forward," she reports, noting that despite the recent success of a pop-up temporary store in Manhattan and urban street location opportunities,malls remain The Limited's bread and butter. "We have an incredible opportunity to double our store base."

"I'm confident that as we start a combination of aggressively growing our e-commerce business and opening new stores, we can re-engage a host of women to our brand," she says. "This is a very exciting time."

The Mover

On joining Naxos of America as COO in 1998, Jim Selby's first task of note was to move the classical music label company from Pennsauken, N.J., to a town near Nashville, Tenn. For a company whose businesses center around music and distribution, relocating from a Philadelphia suburb to an area famous for its role in recording history and from which 50 percent of the U.S. market would be within a 650-mile radius made perfect sense.

Since then, Selby,who was named CEO in 2007, has been pursuing an even more critical strategic move— transforming Naxos from a company that primarily distributed music through retail outlets to one equipped to market its products—in CD and digital recording form—directly to consumers. Over the past decade, the revenues of most record labels have suffered mightily from the demise of major brick-and-mortar outlets like Tower Records and flagging CD sales. Naxos of America has largely escaped that fate, says Selby, who notes that the company was one of the first labels to offer its catalog online.

"We were digitizing our catalog back in 1996," he says. "A lot of record labels are still struggling with meta-data issues that we figured out a long time ago."

Resisting evolution to digital products and online venues, he adds, is futile. Sales of physical CDs dropped by more than 16 percent in 2009, and will continue to decline. "Labels are putting their heads in the sand and hoping it won't happen, but CD sales are going to go down," says Selby. "We've chosen to grow our business by focusing on selling content in whatever form the market wants to consume it—download, streaming, a physical product."

The company now markets tracks— its own and those of some 130 other labels—through online stores like iTunes, Amazon and eMusic, as well as its own ClassicsOnline.com and Naxosdirect.com. In fact, digital transactions now account for more than 65 percent of total sales. That shift has prompted a corresponding change in the company's approach to marketing.

"When we lost our major retailers, we lost the music lovers who sold person- to-person on the sales floor," says Selby. "Before, customers trusted the guy at Tower Records with the bone in his nose who told them, 'If you liked that, you will like this.'" Today, such referrals come from a wide array of sources, which Naxos reaches with a formidable digital marketing program that includes presences on Twitter and Facebook, as well as its own YouTube channel and in-house blog.

The company has also developed a lucrative subscription music-on-demand service for the college market. The Naxos Music Library, which contains 41,000 CDs and almost 600,000 tracks, serves as both an online jukebox and a music database. Students and professors at subscribing schools can simply listen to music— via streaming only, downloads are not available—or create playlists and research composers and artists.

The service has been a hit with both schools and students, with subscription sales growing by 35 percent annually. "We sell them in blocks of five user licenses at approximately $1,000, so it's pretty easy to get them to sign on," says Selby, who explains that the schools typically buy more licenses as additional students and professors start trying to access the service and are turned away. "We monitor that and tell them, 'Hey, you're getting a very high turn-away rate. You need more licenses.' So it ramps up pretty quickly."

Naxos of America's efforts to diversify and digitize its business are paying off. Sales topped $20million in 2009, up 25 percent from the previous year, and the company is the U.S.'s No. 1 independent distributor of classical music. "A lot of the other record labels are struggling and we're not," says Selby, who credits a pragmatic approach to a business once known for wretched excess for that happy circumstance.

The glamour days of record labels being all about star-making and star lifestyles are long gone, he says. "Do I really want to be employing 12 people to do meta-data entry? I'd rather just be selling records. But the streaming products, the databasing, the licensing with Hollywood—we have to do all that stuff. Because if we just hang our hats on physical CDs, the end is inevitable. That's the reality of life in the music industry."

CEO Confidence is on the Rise

CHIEF EXECUTIVE MAGAZINE'S CEO CONFIDENCE INDEX rose in May by 15.6 points to 109.9—a gain of 14.2 percent.

The Current Confidence Index had the largest percentage increase, rising 24.4 percent to 86.9. Nearly 60 percent of CEOs forecast slow, continual growth in the economy. "We generally feel that the overall recovery will be gradual with some sectors growing faster than others, mostly dependant on government actions," one CEO told Chief Executive.

The Employment Confidence Index rose 21.5 to 104.1, a gain of 20.7 percent. The growth in the employment confidence index shows a decrease in pessimism, not an increase in optimism. CEOs rating employment conditions as "bad" decreased from 90.6 percent in April to 76.5 percent in May, while CEOs rating the employment conditions "normal" rose from 5.1 percent in April to 18.2 percent in May.

The Business Condition Index gained 13.2 percent, climbing to 119.2. This also reflects less pessimism, not better business conditions—55.6 percent of CEOs rated business conditions as "bad," an improvement from 74.5 percent in April. Only 10.5 percent of CEOs rated current conditions as "good" while 33.8 percent rated current conditions "normal."

The Investment Confidence Index rose to 106.2, gaining 10.5 percent. Some CEOs are seizing the moment with strategic acquisitions; one CEO commented, "We still believe that the hobbled U.S. economy makes this an excellent time to acquire additional companies. We are negotiating for another acquisition right now."

The Future Confidence Index increased 9.6 percent, rising to 125.4. A cautious optimism seems to be the favored sentiment, but global concerns could disrupt the recovery.

While the recovery is gaining steam, there remain a number of concerns. "The current bump in GDP will not last… The other shoe has yet to fall concerning home loans and defaults," predicted one CEO. Added another, "We're likely to see the economy pick up in the next quarter, but the global situation could reverse the improvement trend. All said, we may see some quarterly growth the next few quarters, but watch out for the real devil behind the scenes."

About Jennifer Pellet

As editor-at-large at Chief Executive magazine, Jennifer Pellet writes feature stories and CEO roundtable coverage and also edits various sections of the publication.