Stepping forward Featured

8:00pm EDT April 25, 2008

It was a good product with a catchy name, but the rollout was all wrong. Greg Tunney knew the Terrasoles brand had great potential for R.G. Barry Corp. But he also knew if the company’s newest brand was ever going to reach its potential, they’d have to start over. From scratch. Immediately.

“We literally pulled it off the shelves for a year and killed it,” says Tunney, president and CEO of the Pickerington-based company. “We took it out of the marketplace. Then we dusted off that little brand called Terrasoles, repositioned it, and went after a whole different marketplace with it and a completely different price point.”

The response was immediate. Last fall, 235 outdoor-themed retailers across the country, including L.L. Bean, signed on to carry Terrasoles, and sell-throughs nearly doubled expectations.

“The people we’re going after never heard the name Terrasoles in their life,” Tunney says. “It was completely new to them.”

That was a good thing. After all, the reason the previous rollout had been so disastrous was because R.G. Barry, a company long-known for its Dearfoams brand of slippers, had tried to make Terrasoles, a vastly different, outdoor-themed line of footwear, part of the family.

“They had Dearfoamized it and killed it,” says Tunney, who joined R.G. Barry in February 2006, after turnaround artist Tom Von Lehman spent two years saving the company from near-bankruptcy.

To ensure nothing else would be “Dearfoamized” at R.G. Barry again, Tunney has taken some drastic steps since joining the company. He relegated the Dearfoams staff to its previous job of designing slippers and built a completely separate division for Terrasoles. He recruited outsiders for all the key positions at Terrasoles — the brand president, designer and marketing team — and even contracted with independent sales reps to hawk the brand to retailers in the outdoor industry.

“We didn’t use anybody from inside here,” Tunney says, noting that a clear separation between the brands is vital for Terrasoles ongoing success.

“We wouldn’t even want them having lunch with the Dearfoams people,” Tunney says. “We say that tongue-in-cheek, but we really mean it. In today’s marketplace, the consumer can sense and smell authenticity a mile away. Unless your brand is true to its core, true to its DNA, the consumer will sniff it out in a minute.”

That’s why Terrasoles had to be rebuilt from the ground up. It’s a reincarnation strategy that Tunney is applying with success throughout R.G. Barry these days. And it’s a key reason the $105 million company, which was chin-deep in red ink just a few years ago, has rebounded to record net earnings of $25.1 million in fiscal 2007.

“This is probably a Harvard business case as far as successful turnarounds go,” Tunney says. “Within the apparel footwear companies, it’s probably one of the top turnarounds I’ve seen in the last 20 years.”

The Turnaround Management Association appears to agree. The international organization of business turnaround specialists named R.G. Barry its 2006 midsize turnaround of the year.

Here’s why Tunney is sure R.G. Barry is back on its feet and what he’s doing to make sure the accessory footwear developer won’t stumble significantly again.

Sole survivor

Five years ago, some thought the long-time maker of Dearfoams slippers was dead.

R.G. Barry had recorded three consecutive year-end losses — the worst totaling $21.7 million in fiscal 2003 — and net sales had dropped $18.4 million in a single year. A $10 million bank loan had been called in, and the company’s stock was delisted from the New York Stock Exchange.

“The company was going through some horrible times and didn’t look like it was going to make it,” Tunney says. “A lot of the team members here had to answer questions from their friends, their family, their spouses about, ‘Hey, what’s going on over there? Are you guys going to make it?’”

Now that the company has come out on the other side — returning to profitability in fiscal 2005 and setting last year’s earnings record — the victory is that much sweeter.

“The company’s doing great,” he says, noting that he expects revenue to grow at least another 4 percent this fiscal year and profits to increase 6 to 10 percent, despite the weak retail environment. “I’m hoping that our team members here get to enjoy the good side because they went through the bad side.”

Tunney didn’t mastermind R.G. Barry’s turnaround. In fact, he wanted nothing to do with it. He’d orchestrated turnarounds for companies like Brown Shoe Co. and Phoenix Footwear Group Inc. before coming to Ohio and knew all about that sleepless, pit-in-the-stomach stress that accompanied bringing nearly dead companies back to life. So before he agreed to take the top spot at R.G. Barry, Tunney made sure the turnaround was complete.

“When I got here, they had already changed the model and said, ‘We’re going to get out of manufacturing.’ So I didn’t have to get my hands dirty and bloody and all that stuff,” he says.

During the turnaround, R.G. Barry closed all three of its manufacturing plants in Mexico, shut down an operation center in Texas and cut more than 90 percent of its work force. At its peak, the company employed more than 2,500 people. Today, R.G. Barry has just 130 employees.

“I didn’t have to live through that,” Tunney says. “One of the things that attracted me to this company was I wasn’t going to have to go through the turnaround and do the clean up. It was a company that was ready for growth.”

The first step

Tunney’s primary job when he arrived on the scene two years ago was to take the pared-down company and develop a growth strategy to move it forward.

“A lot of people when I came here, their big thing was, ‘What’s the strategy?’ like there’s some magic pill or something,” he says. “What we’ve focused on here is really the development of good leadership and good managers.”

After all, no matter what strategy you come up with, Tunney says, things change. Having a leadership team that can roll with the changes and overcome obstacles is a growth strategy in and of itself.

Tunney illustrates his point by singling out what could have been a terminal flaw in the business plan he developed with his new leadership team.

“We never put in place that a barrel of oil would go from $60 to

$100,” Tunney says. “But you’ve got to realize a big portion of our products are petroleum-based; they come from oil. We weren’t smart enough to have that in our strategy to say that oil was going to virtually double.”

So R.G. Barry’s leadership team — which received extensive training from The Covey Institute shortly after Tunney’s arrival — got to work and started cutting expenses elsewhere and finding more efficient ways to operate in order to offset the increase in oil costs.

“When you look at the expense we’ve taken out of this company in the last 18 months alone, it isn’t because I’m the smart guy and I’m doing things behind the curtain pulling the levers,” Tunney says. “It’s because we have people who have been given the leadership tools to really figure out what we have to do to re-engineer and restructure our business to take advantage of that.”

For example, R.G. Barry reduced its selling, general and administrative expenses by roughly $3 million between fiscal 2006 and 2007, putting that line item at its lowest point in at least five years.

“If you develop your team and help your team grow, they will grow your business,” Tunney says. “That’s what’s happening here.

“I wish I could come up with the perfect strategy each year, but I’m not that smart. And as we go forward, the economy is going to get more and more turbulent; it’s going to get more and more tricky, so that’s why I’m more interested in how well we can develop these people. The better we develop them, the better they’ll be able to respond to the economic challenges that are out there.”

Creating a bigger footprint

Diversifying R.G. Barry’s product line beyond the widely known, but seasonal, Dearfoams slipper brand has been another high priority for Tunney.

“We really were concerned that the company was a one-trick pony,” he says. “We love the slipper business, but it can be very seasonal. We thought the company had much more capacity to get into other channels of distribution, other types of product extensions.”

Terrasoles was only the beginning.

Tunney’s next step toward diversifying its products and expanding its profit margin is Superga, an upscale Italian-based line of canvas footwear that debuted at Nordstrom’s and other high-end retailers this spring — a season that’s typically been slow for the Dearfoams company. Then there’s the agreement R.G. Barry signed in January with Nautica Apparel Inc. to develop and market slippers under the Nautica and J-Class brands. And the acquisition of NCAA College Clogs from Wolverine World Wide Inc. last May. All of these deals — including an agreement for R.G. Barry to be the exclusive licensee of Superga in Canada beginning this July — could significantly even out the company’s revenue stream.

It’s not the first time R.G. Barry has tried to lesson the seasonality of its business. Under long-time CEO Gordon Zacks, the company developed Microcore, a thermal technology in the mid-’90s that could be used to heat or cool a variety of products from slippers and seat cushions to Pyrex dishes and pizza delivery bags. The division took on a life of its own and was ultimately sold.

Tunney says this attempt to produce more year-round revenue will be vastly different.

“First, we are focused on products for the foot,” he says. “When we tried to get into those other things, they weren’t our expertise. We didn’t really bring a whole lot of authenticity to the marketplace. We do have a good name in the marketplace with slippers. We have an iconic brand in Dearfoams. When you say Dearfoams, people say slippers. So with those relationships, we felt there was an opportunity to really leverage those within different channels of distribution.”

Being able to roll out these new brands, supported by the tried and true — yet invisible to the consumer — finance, credit and supply chain logistics that R.G. Barry mastered under the Dearfoams label, creates even greater leverage.

“The things that don’t directly touch the consumer — the backroom part of our business — we can get some really great synergy out of that because we have some really great teams operating those,” Tunney says

Other potential diversification targets include designing more products that appeal to men and possibly entering the children’s market.

“I mean, why aren’t we doing children’s slippers?” Tunney asks. “We have customers right now who are saying they’d love to do children’s slippers from us. It’s just a matter of prioritizing things.”

Getting an international toehold

Even with so many new products poised to reach the market this year, Tunney remains interested in expanding R.G. Barry overseas.

Never mind that the company just sold its French manufacturing plant. He regards that decision much like the first Terrasoles rollout: It was time to start fresh and in a completely new direction.

“They went after it as manufacturing,” he says. “That’s not going to be our strategy. We like the idea of a distributor and a licensing deal where we can just let them be the experts in the marketplace and collect our royalties off of them.”

R.G. Barry’s upcoming expansion into Canada with the Superga line is structured that way, and it could lay the groundwork for becoming a more global company.

“Right now, [the] United States is not the biggest user or wearer of slippers,” Tunney says. “European countries tend to be bigger users. There are even places like Argentina or Chile that are also big slipper users that aren’t exposed to a national brand or international brand such as ours. So we think it’s just a matter of getting the right partners and getting some focus and some investment against it.”

Tunney expects R.G. Barry brands to be established in Europe, South America and the Far East in the next five years.

“I think our biggest challenge going forward is going to be the investment community,” he says. “We’re making a lot of money investments now that will pay off in four or five years. One thing we tell our investors all the time is, ‘This is not the widget business. This is not the toothpaste business. We’re in the fashion business. So on a five-year scale, you’re not going to see a linear line moving steadily up. But even though you’ll see erratic shifts, long-term, you’ll see a linear line through all that. If it was only linear, I would tell you that, as a fashion company, we’re not taking enough risks. And we’re probably missing opportunities then.’”

In fact, it’s the hard times that make a company stronger. “We’ve been fortunate,” Tunney says. “We haven’t had a disaster or a bad year since I got here. It will happen. Trust me. I keep warning these guys that we’ll get really good when we have a tough year. It’s the tough years when you find out who is really on board and you really grow and stretch yourself. I actually look forward to even that. But our investors don’t.”

HOW TO REACH: R.G. Barry Corp., (800) 848-7560 or www.rgbarry.com