weekly feature | May 15, 2019 |
An imperfect union: What went wrong at Robert Allen Duralee—and what’s to come?

Thursday, May 2 was an eventful day for the Robert Allen Duralee Group. That afternoon, the court overseeing the fabric giant’s bankruptcy proceedings approved the company’s sale for $19 million, saving it from liquidation. The buyer? RADG Holdings, an LLC that had been created just a few weeks prior by Brant Enderle, a Knoxville, Tennessee–based real estate developer with no previous history in the fabric industry.

Enderle issued a round of layoffs that Thursday, letting go of a reported 36 employees. Among those handed pink slips were much of the executive leadership team, including CEO Lee Silberman—a longtime Duralee executive who was appointed CEO following the company’s merger with Robert Allen—as well as the customer service and credit departments in the company’s Hauppauge, New York, headquarters.

In one day, Enderle had both saved the Robert Allen Duralee Group from extinction and wiped out much of its institutional memory. According to a former employee with knowledge of the cuts, Enderle made layoffs based on a formula he has developed over the course of his career—an ideal ratio between revenue and payroll. He looked at RADG’s earnings, then started pruning from the top.

At the May 2 hearing, Enderle also rejected many of the showroom leases—including those at the Atlanta Decorative Arts Center, Boston Design Center, Market Square in High Point, Merchandise Mart in Chicago, and Pacific Design Center in Los Angeles—as well as its Broad Street offices in Manhattan. He’ll now be able to negotiate his own terms with design centers, and is said to be eyeing cheaper real estate in Queens, New York, for the company’s new headquarters.

Are all the cuts a case of amputating a limb to save the life of the patient?

“Some of those are good decisions,” admits one source, a former top-level employee who asked to remain anonymous and said that the Broad Street space was expensive—and too large for what the teams there required. “Especially in the market today, I don’t think anyone knows what the right formula is.”

A Troubled partnership

The merger of Robert Allen and Duralee was announced in March 2017 with much fanfare. But underneath the corporate enthusiasm, the picture was far less rosy: “Both companies were ill prior to the merger,” says a former employee with knowledge of the deal. One, the source says, could have survived: Duralee. Robert Allen, on the other hand, was destined for dissolution; Altamont Capital Partners, its investment firm owner, had grown weary of funding the company. “They were going out of business on May 1. If the deal didn’t go through, Altamont was pulling the plug.”

Their lead times were killing them. Before the merger, the fact was that Robert Allen couldn’t deliver.
A former RAD Group employee

Former Duralee employees say that the Robert Allen brand came into the merger under a shadow, struggling with an overburdened expense sheet and an unreliable sales force. “Most customers didn’t know who their road rep was,” a source tells BOH. “They were strong in certain categories—their contract and manufacturing divisions, especially—but the showroom and road business was deteriorating.” Also, though Robert Allen had a lot of inventory, it wasn’t what customers wanted. Without the proper analysis, unpopular patterns and colorways languished in inventory season after season.

The other problem was a manufacturing issue: “Their lead times were killing them,” says one former employee. Delivery times of 12 to 14 weeks—and sometimes longer—were the norm. “Before the merger, the fact was that Robert Allen couldn’t deliver. It was a huge opportunity for companies like Kravet, Fabricut, and even Duralee, who all could.”

Duralee, on the other hand, seemed to be thriving in the areas where Robert Allen needed the most help. Former employees describe a customer-first culture with a strong showroom staff, a successful network of road reps, and an easy-to-use web platform that designers raved about. As news of the merger began to spread, they say, designers began to express concerns. “They would be telling us all the problems they were having with [Robert Allen’s] platform and abysmal website,” says one. “They’d say, ‘Keep the Duralee website, it’s the best in the industry.’ What did we do? We did the opposite.”

TECHNOLOGY WOES

The ultimate Achilles’ heel in the merger between the two companies seems to have been their computer systems. Woven throughout the bankruptcy filings and former employees’ tales are complaints about technology integration.

As a partner in the newly formed company, Altamont insisted that Robert Allen Duralee Group adopt Robert Allen’s computer system, the AS400. “It wasn’t until after we all switched over that they started to recognize all of the system’s shortcomings,” says a former employee. “Management had to do an immediate about-face. In order to stay in business, the two companies had to function on two different platforms. But even after consultants agreed with the CIO that the AS400 could not function, Altamont was not going to invest one more penny.”

Again and again, former employees point to the two computer systems—and their inability to talk to each other—as a core failure of the merger. As they elaborate on the day-to-day frustrations of working between two systems, a maddening picture emerges. For some time, the company operated with two account numbers for every client, leading to rampant confusion. Sales reports went missing, inventory was difficult to assess, and credit card payments ended up getting lost between departments.“Tracking all that stuff wasn’t always accurate,” says one former employee in summation. “There was a lot of confusion.”

The computer systems seemed to represent an overall culture clash between the two companies. “Part of the downfall was that they could never come up with a common language,” says a former employee. Duralee, founded in 1952, retained the easy, carefree fluidity of a family-owned brand beloved for its creativity and accessibility. Robert Allen, on the other hand, had changed hands several times since its founding in 1938. Its last owners, Altamont, took a stake in the company in 2011 and appointed veteran fashion executive Philip H. Kowalczyk as company president and CEO. (He left the company in March 2017 when the merger with Duralee took place.) Robert Allen still had a high-end caché, but had been managed by several corporate firms whose detail-oriented practices were at odds with the more freewheeling Duralee team.

This isn’t the first matchup to be plagued by technology woes; case studies about IT conflicts that have toppled major mergers abound in a variety of industries. But it is a good lesson in due diligence for the industry: “What happened to this company happened because Robert Allen and Duralee were so behind the times and mismanaged,” says a former employee. Though customers might have preferred Duralee’s user interface, the company wasn’t as tech-savvy as its platform suggested. “It should be a cautionary tale to all of these little family businesses still running the way they used to be. If they don’t modernize, invest in technology, and get out there on the web, they’re not going to make it, either.”

THE FALLOUT

Though the former employees we spoke to pointed fingers at the Robert Allen side of the business, it wasn’t all rosy at Duralee, either. When the company’s beloved founder, Leonard “Lenny” Silberman, was alive, he routinely pumped money into the business following the 2008 recession, according to a longtime former employee. His death in April 2016 was a tremendous loss for the industry. His nephew, Lee Silberman, took over the company, but without Lenny’s cash infusions, its balance sheet remained more precarious.

Still, the company’s strengths seemed to align with the weaknesses of Robert Allen’s business, and former employees say that, at the time, the merger felt like a tremendous win. “We thought that the strength of existing Duralee talent and management teams, combined with the power of the Robert Allen brand, even after five years of decline, could offset the challenges and turn customer confidence around,” says a former employee. “The absence of confidence in the company’s ability to deliver product in a timely manner was a challenge, sure, but Robert Allen was still a good-looking and sellable brand.”

Enthusiasm around the office soon took a hit. After 40 years of growth, Duralee’s sales softened starting in 2015, sources say. “We thought it was a big decline then, 1 or 2 percent,” says a former employee. “But after the merger, it was double-digits.” Some longtime designer clients stopped placing orders due to unreliable service. “We were giving information about when [an order] would come in, but it wasn’t reliable because of credit issues with the mills,” says a former employee. “Sales reps did their best to keep the customers coming, but eventually clients gave up because it was too difficult to do business with us.”

For former Duralee employees, the decline in customer service—something they once prided themselves on—was a blow to morale. By 2018, employees started to leave in droves. “Listening to upset customers 24/7 is difficult,” says another former employee. “People are begging to give you business, but you [know you] can’t fulfill that business. Do you know how devastating that is for a seller?”

A SELF-DEFEATING CYCLE

Secretly, Silberman was looking for a new owner to buy the company out of its problems. “Both companies were undercapitalized before the merger, and the merged entity remained undercapitalized,” he told some of the company’s top leadership in a closed-door meeting September 2018. “The hope was that with the merger—and with the ability to cut overhead as a combined company—we would have been in a position to organically grow the capital we needed.” The lack of capital, he said, explained the mill delays.

In a recording of the meeting obtained by BOH, Silberman tells the assembled employees that he and former CFO Bill Fuchs had known since the time of the merger in early 2017 that Altamont would not be supplying additional capital to the newly formed company. He also explained that Altamont had communicated in April 2018 that it wanted to exit the company, and he’d been tasked with bringing a buyer to the table. His spin was positive: “They have treated us with benign neglect,” he said of Altamont. “In looking for a partner, I’ve been making it very clear … that when the deal is done … we will have the capital we need to pay off our vendors, take care of our mill delays, and fix all of our technology problems. And the companies I’m talking to are well aware of that situation and are still interested.”

At the time, Silberman said that four companies had expressed interest in acquiring Altamont’s stake. None had made an offer yet, but he was confident: “I’ll be very surprised if at least one of them doesn’t come to the table.” (Rumors about Silberman’s dealmaking abounded in an unhappy office. Silberman declined to comment for this story, but others rallied to his defense. “It is easy, in hindsight, to criticize the CEO,” admits one former member of the group’s leadership team. “But the fact of the matter is, he governed with one hand tied behind his back. Without the necessary resources, the merger was doomed from the outset.”)

In the meantime, former employees say that the company’s health continued to worsen. It was a self-defeating cycle: The cash-strapped company strung its mills along, trying to sell more product in order to make ends meet; the mills, sensing the company’s volatility, began to change their terms—some requiring payment up-front, which resulted in production delays if Robert Allen Duralee couldn’t write the check. “It made it very hard to fill orders,” one former employee recalls. “You’re telling the client that it will be 10 to 12 weeks, but if [the company] didn’t have a sizable enough order after 12 weeks”—and some mills began instituting 100-yard minimums—“then you had to determine whether or not to honor the order.” As the company lumbered on, its problems got worse.

When you owe a company in India $20,000—that’s like $200,000 to them, and if they don’t get that payment, their company is destroyed. Those were the kinds of emails the team was getting.
A former RAD Group employee

It’s notable the company’s largest unsecured creditors were its suppliers. In filing for bankruptcy, Robert Allen Duralee Group defaulted on $2.575 million owed to Valdese Weavers, $1.68 million to Sumec Textile Co., $979,000 to Triplex Shanghai Enterprises, $746,000 to EDPA Tekstil, and $650,000 to P Kaufmann. Those that got burned, says a former employee with knowledge of Robert Allen Duralee’s finances, are the ones that stuck by the company when times got tough. “They trusted our ability to honor our commitment.”

Morale at the company continued to sink. “When you’re seeing the numbers every day, customer orders canceled, the struggles showrooms were having, threatening letters from mills, and a lack of performance from the CEO and upper management—the writing was on the wall,” says one former employee. “When you tell someone the check is in the mail, it should be in the mail. One of the interesting things about a textile company [is that it’s often] a global business. When you owe a company in India $20,000—that’s like $200,000 to them, and if they don’t get that payment, their company is destroyed. Those were the kinds of emails the team was getting.”

Starting in December 2018, the company implemented more aggressive cost-cutting measures, including shuttering redundant showrooms and several rounds of layoffs, which were projected to save the company some $20 million. By January 2019, the third round of layoffs targeted the product development, product management and marketing departments—part of the business’s final push to combine its two teams, Silberman told BOH at the time.

But all of the cuts were taking a toll. In an internal email distributed to employees, Silberman wrote:

Over the course of 2019, it is our plan to produce and distribute fewer books than we produced last year in five product launches. We believe that our strategy of the right number of targeted collections with unique stories will work to bolster sales.

By implementing this new strategy, we had to adjust the number of employees in the departments that specifically touch product creation, book design/production, product management, and marketing. The ongoing showroom consolidations have impacted our showrooms staffing requirements as well. We regret that we had to implement layoffs in these areas, but strongly believe that our teams will work diligently to implement our new strategy and move the company toward our goal of long-term success.

Despite Silberman’s calm tone, it was clear that the company was in crisis mode. Another major round of cuts to the design and product management teams took place two weeks later, as whispers of a soon-to-close deal abounded. Instead, by mid-February, Robert Allen Duralee had filed for bankruptcy.

Filings ultimately revealed that the company had trimmed its annual budget by $10 million to $12 million by November 2018, but that it struggled to implement other cost-cutting measures, including the consolidation of duplicate showrooms within design centers. (Following the merger, one nagging item on the company’s balance sheet was the operating expense for both Robert Allen and Duralee showrooms in many design centers—leases the newly formed company had been unable to exit.) The company cited a 14 percent decline in sales for each of the two years since the merger, which were attributed to the costs of staffing and rent, software and hardware integration issues, and a soft market overall. The company, which employed 725 people when Robert Allen and Duralee merged in March 2017, had shrunk to 410 employees. Less than a month after the bankruptcy filing, another 119 employees in the company’s Long Island offices were let go.

CHAPTER 11

In a letter to employees that was obtained by BOH, Silberman informed staff that the bankruptcy would hopefully clear the way for a takeover: “We believe this court-supervised process is the best way to solidify and enhance our financial position. Filing for Chapter 11 provides us with an opportunity to reorganize and look for a company to purchase us so that we have a more stable future.” To that end, he wrote that RAD Group had hired an investment banking firm to assist in the process, and was “aggressively pursuing multiple prospects.”

We all had to sign NDAs, and no one could communicate outside—or within—the organization without approval.
A former RAD Group employee

After the bankruptcy filing, employees lived in fear of the unknown. “Our job was primarily to put out fires,” one former employee recalls. “It was all about survival mode—generating as much business as possible, as cheaply as possible.” But it was difficult to do even the bare minimum. RAS Management, a crisis management and turnaround firm, was running the show under the leadership of the firm’s president, Timothy Boates, who is named in court filings as the company’s chief restructuring officer. (RAS Management billed just over half a million dollars for the period of February 12 to March 30.) “We all had to sign NDAs, and no one could communicate outside—or within—the organization without approval from him,” said the former employee. “The whole atmosphere was governed by rumor and RAS was running the ship.”

How did Enderle enter the picture? “He was the last man standing [in the court-supervised bidding war],” says another former employee, who also spoke on the condition of anonymity. “People within the industry saw that there was too much inventory and didn’t think [the company] was recoverable.” Other interested parties were said to include Harbour Group (the investment firm that owns Thibaut), Kravet, and the Pennsylvania-based ELK Group International.

Following the Chapter 11 filing, financial services firm Great American Group was brought in to assess how to best recoup its money—either through the sale of the company or complete liquidation. Their valuation of the company established the baseline amount that the company expected to get from a stalking horse bidder, on the premise that otherwise, they’d recoup more by dissolving the company and selling off its assets.

“My understanding is that just about everyone in the industry felt that Great American overvalued the [Robert Allen and Duralee] inventory,” says one insider. “You might be able to close out old inventory at 50 cents on the dollar in most industries, but for us, if it is more than two years old, you’re getting 10 cents on the dollar.” The discrepancy led to what several sources called an immense overvaluation of the company. “At that point, the industry people walked away,” says one. The bank, on the other hand, was happy with the high number and brought in the investment company SSG Capital Advisors to court potential buyers.

According to a filing summarizing SSG’s work, the firm contacted 161 potential buyers, executed 56 non-disclosure agreements, and took five calls and three site visits with interested bidders. In addition, 44 qualified bidders conducted due diligence. Of all of these interested parties, only one qualified bid was received. It came in at $19 million—$8 million in cash up front, with the remaining sum, less expenses, to be paid after the closing—from Enderle, who sources suggest had done business with the investment company in the past. (Court filings detailing the purchase state that the sale price of the company likely brought at least $5 million more than an asset sale would have.)

A new owner, a new name at the top

Enderle came to the deal with a somewhat murky reputation. A longtime real estate developer in the Knoxville area, he has a pattern of purchasing a distressed asset, talking revitalization, then letting it sit. Past investments include a struggling shopping mall; a brewery that ceased operations in 2017; the dilapidated campus of a historically black college in Morristown, Tennessee, that was eventually repurchased by the city; and a shuttered textile mill that remains undeveloped. “​I, like most people in Knoxville, have way more questions than answers,” Jesse Fox Mayshark, a longtime local journalist who has covered Enderle’s business dealings, tells BOH. “Nobody can figure out what his deal is.”

Despite a somewhat cloudy reputation, Enderle seems to be doing some things right, according to some sources. And if nothing else, so far, he’s deeply involved at every stage of the process himself. Once he put the bid in, he took the time to meet in-person with Broad Street–based employees, and to schedule calls with remote managers. The conversations were similar: He asked questions, they answered. “Who are you, and what do you do for the company?”

I’ve made millions, I’ve lost millions.
I want to buy something for my kids.
Brant Enderle

But to a few employees, Enderle let his distaste for the fabric business’s status quo slip into the conversation. “‘This is a failed business,’ that’s what he told me,” says a former employee who met with him. “He didn’t just mean our business. Our competitors, too, are failed companies [to him]. He said that radical changes are needed. What that means, he never elaborated.”

Enderle also shed some light on why he wanted to invest in the company: “I’m buying the company for $10 million. It’s worth $100 million,” he told a group of employees at a meeting. “I’ve made millions, I’ve lost millions. I want to buy something for my kids.” He did not respond to requests for comment for this story, so BOH was unable to determine whether he misspoke in the meeting, or actually undervalued his own $19 million investment by about half.

WHAT HAPPENS NEXT?

News from within isn’t all bad. After the first team meeting led by Enderle following the sale, some of the remaining staff felt heartened by his no-bullshit analysis of where the company had gone wrong, and his salty take on Silberman’s failures rang true for many who had weathered the previous two years. Enderle promised to shake up the industry—but employees will have to wait 60 days, he said, to find out more about his plans.

For those who were let go, many of whom had worked for Duralee for a decade or more, relief mixes with their worry and grief. “It's sad, because both Robert Allen and Duralee were such significant companies in the industry,” said one. “But it doesn't seem like RADG will ever be the powerhouse that it was supposed to be. I think I am better off looking towards something new.”

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