Beating bankruptcy

Alan Gladstone stood at his father’s gravesite in October 1993, looking for guidance and wisdom to help him through the bankruptcy that his company, Anna’s Linens Inc., was about to enter.
Whatever role supernatural intervention might or might not have played, Gladstone says he walked away with a different attitude toward his troubled situation.

“I had a very personal moment there, and I tried to understand how I could get myself in this position because I had known nothing but success,” says Gladstone, president and CEO of Anna’s
Linens. “Chapter 11 to me in those days was like a scarlet letter. How could I put myself and my company in such a horrific state? I think I cleansed my soul and stopped feeling sorry for myself
and went about getting the company to thrive and prosper.”

That was the first step to leading the company out of bankruptcy, which ended in December 1994. Today, the discount home furnishings company operates 250 stores — 10 times more
than it had when it reorganized — and sells more household textiles than some of the biggest retailers in the country. The privately held company, named after Gladstone’s mother, posted $290 million in 2005 revenue.

Gladstone had built Anna’s Linens from one store in 1987 to 44 at the time of the bankruptcy. The chain was doing well until El Nino rains and deep cutbacks in the aerospace and
defense industries decimated the Southern California economy. The economic collapse left 25 of Gladstone’s stores holding their own, but the other 19 — most of them in what
Gladstone calls the company’s “inner empire” in towns including Riverside and San Bernardino — losing enough to drag the rest of the business down.

Gladstone figured that he could save the company by negotiating his way out of the leases he held at the failing stores.

“We went to every developer and said, ‘This store is hemorrhaging, you can see it from our sales figures, you know what’s going on in the entire center,” says Gladstone. “If you do not
help us work out a termination right and pay you some money, we’re going to have no recourse but to file Chapter 11.”

The landlords weren’t unsympathetic to Gladstone’s predicament, but their situation wasn’t much better and might have gotten worse had they cut a deal to let Anna’s Linens out of
the leases.
“They were all having their own difficulties, and as much as they heard our story and wanted to help, they were worried that it would trigger other people coming to them for the same
reason, and they couldn’t move,” says Gladstone. “So we had to do what we needed to do to protect the assets of our company and our people.”

Left with no alternative that he could see, Gladstone filed a Chapter 11 petition to reorganize. He says the hardest part was facing the prospect of losing his company and failing, something that he hadn’t experienced since he began working in retail in 1970.
“I looked myself in the mirror that first day and said, ‘Mr. Successful Guy, look where you are now, how did this happen?’” says Gladstone. “And I put down on paper the mistakes that
I made. It was easy to blame the economy and the geography and the tough business climate. Those were easy cop-outs. But I hired the wrong real estate person, I hired a wrong merchandise person. There were some decisions that were made that just weren’t correct.”

And Gladstone acknowledges that he took his eye off the ball when it came to some key aspects of the business. He had hired people to handle real estate and merchandising, gave
them too much autonomy and didn’t follow up the way he should have.
“I think I started to read my press clippings,” says Gladstone. “I think I thought that maybe I didn’t have to work six days, that maybe I could take an afternoon off and play golf. I
thought maybe if I let them make decisions, they would grow as managers, and I wouldn’t have to be involved in those areas. The areas I backed off from were the ones that bit me,
real estate and merchandising.”

The first thing Gladstone did after the filing was to hold a town hall meeting with employees to explain what was happening and what the company’s plans were to emerge from bankruptcy.
“I had a town hall meeting and talked to every district manager and person in the office and told them, ‘I need you more than ever,’” says Gladstone. “I can’t give you any raises because
we don’t have the money. But if you stay with me, I promise you that we will emerge from this a much better company.”

Gladstone extended that candor to all parties involved: vendors, bankers, the bankruptcy court.

“I was very honest to everybody,” says Gladstone. “‘Here’s where we are, here’s where we’re going to be if we do the following.’ We let everyone know every month our sales, our earnings, our inventory levels, our borrowings.

“Everyone knew where we were. There was no guesswork. I remember telling the attorneys that we had to give the financial information by the end of the month to the creditors, but
we had it to them by the 15th. We underpromised and overdelivered, and that developed a sense of confidence in our management and our company.”

Taking decisive action
Gladstone says one of the most important factors in helping Anna’s Linens work through its bankruptcy was engaging good legal counsel with deep experience in bankruptcy law.

“We hired an expert counsel to guide us through this because I had never been involved in a bankruptcy,” says Gladstone. “We did what they recommended in almost every instance.”
Gladstone acted quickly and decisively to prune the people who had been responsible for some of the company’s troubles.

“We terminated a few people that were unproductive and helped cause the problem, and I take full responsibility for that,” says Gladstone. “They were under my watch and I hired
them. In some cases, I delegated too much and they weren’t prepared. We terminated the people that needed to be terminated up front; nobody after the Chapter 11 filing.”
Gladstone managed to hold onto key vendors and employees throughout the bankruptcy. He says consistent overperformance inspired confidence in the company.

Only two vendors out of approximately 100 backed away and refused to ship product. And the company didn’t lose any of its management during the bankruptcy, even though raises
and bonuses had to be deferred.
“We underpromised and overdelivered from the moment we entered Chapter 11,” says Gladstone. “If we thought we were going to do $1 million in a month, we said we were going to
do $900,000. If we said we were going to spend $1 million in expenses, we spent $900,000. If we said we were going to be at a certain point with inventory levels, we always had a little
cushion. People trusted the fact that we could continuously beat the projections we gave to the court.
“Our vendors saw that we said that we were going to do $100,000 that month and we did $120,000,” says Gladstone. “If the vendors said ‘You’ve got to pay us in 30 days, we’d try to
pay them in 25 days. How do you build trust? Well, you’ve got to show that what you say is going to happen. I think one of the most important things is to put together a plan that you
don’t need a Herculean effort to exceed. When you do exceed it, it builds credibility.”

Gladstone learned that his easygoing manner was at times misinterpreted by some as softness.

“Sometimes I’m too nice, and people mistake that for weakness,” says Gladstone. “We now know that we have budgets, we have plans, we have pro formas that we must beat.”
After he terminated two senior employees who had been responsible for some of the company’s problems, Gladstone found that employees treated him differently.

“I think when they saw that I was serious about addressing the problems, people knew that you couldn’t push me too far,” he says.

And, Gladstone says, holding people accountable to meet performance goals was essential. He instituted a regular meeting where the managers reviewed key performance measures
and set targets for subsequent months.
“We had monthly management meetings to discuss the previous month’s performance on sales, margins, controllable expenses by each of their areas,” says Gladstone. “If a merchant
said our plan was going to have a 40 percent margin, he knew there was an upside if he improved it and hell to pay if he didn’t.
“I think it’s very important that people have a clear understanding of what’s expected. I’ve found that when there’s a gray area, it bites you. It’s got to be crystal clear and black and

Lead by example
Gladstone says setting an example for his managers and employees played a key role in retaining their loyalty and ensuring that they would work to keep the company’s goals on target.
“I’m the company cheerleader and keeper of the culture, and that hasn’t changed,” says Gladstone. “If I expected the associates to be at work by 7 a.m., I got there by 6:30. If I expected them to stay until 6, I stayed until 6:30. If my friends were playing golf on Saturday, I went to work. I visited the stores, and I led by example. I’m very proud to say that I never asked
anyone to do any more than I did.”

Gladstone shielded his employees, even his senior mangers, from bad news, preferring to put up a happy front so that they wouldn’t worry that the company might fail.

“I never let on when we had some difficult times,” says Gladstone. “Some of the initial meetings with the creditors committee were not pleasant. Some of the projections, if we could-n’t meet them, would have put us in very precarious situations. I had to look myself in the mirror a few times and say, ‘Hey, smart guy, what are you going to do now?’ But I never let
on to anyone else. Only my wife saw the real difficulty.”

Gladstone says his best advice is to do whatever you can to avoid bankruptcy, as he attempted to do by first negotiating with his landlords.

“If you blow No. 1, then you’ve got to do the following: First of all, you’ve got to get experienced, trusted bankruptcy attorneys that can help guide you through something you’ve never
been through,” Gladstone says. “Have a town hall meeting Day One. Explain the situation so people don’t become afraid. Bankruptcy’s such a scary term.”

You also have to be the leader.

“A leader is not just on an organizational chart,” says Gladstone. “A real leader gets people who have common abilities to create uncommon goals. You get 100 percent of what they
have to give.”

Ultimately, Gladstone learned some valuable and lasting lessons from his bankruptcy experience, lessons that have stayed with him and allowed him to grow a bigger, stronger company. Now, instead of the prospect of losing his company, Gladstone is looking forward to the day when Anna’s Linens can go public and to the succession of leadership to his son and
daughter, now active in the business.
“You’re never as good as people say, or as bad,” says Gladstone. “I certainly learned more from my failures than from my successes. It’s certainly kept me grounded and aware of the
value of a good management team and to be very cautious so that we don’t repeat any of those mistakes.”

HOW TO REACH: Anna’s Linens Inc.,