FOUR CASES IN POINT

Who’s Up: Ellis, Inc. Apparel



Not everybody in Dallas these days is proceeding with caution. In fact, clothing manufacturer Jim Ellis is positively sprinting toward 1987 and watching the numbers grow. In 1984 he started Ellis, Inc. with a goal of $6 million in sales, a goal he feared might be a bit exaggerated. Well, he hit $17 million. In 1985 he set a goal of $25 million and hit it with a whopping 50 percent increase in sales. This year Ellis has set his sights on $40 million. Considering his track record, he just might make it.

Whether he hits or misses the $40 million mark, Ellis, Inc. is one of the hottest companies in women’s fashion today, a company that may one day dominate the market à la Liz Claiborne. The Ellis product is a dress that retails for less than one hundred dollars and is, in the words of the effusive founder, “understandable, affordable, and colorful.” With his triumphant entry into dresses behind him, Ellis is now entering the sportswear market, which he feels has an even greater potential.

Ellis, a veteran of the apparel industry, learned the trade at Houston’s Foley’s, Cleveland’s Bobbie Brooks, and Dallas’s Jerell. During his ten years at Jerell, where he rose to vice-president, Ellis became aware of a void in the market.

“What the young career woman wanted in the way of fashion was becoming very apparent, but there were no offerings in a range most of them could afford, or at least afford and still maintain any variety in their wardrobes,” Ellis says.

Remarkably, Ellis has made his high-volume numbers with a sales team that covered less than half the nation during its first eighteen months of operation. “We had only seven salesmen when we started and such hot areas as California were not covered,” he says. “Still, in our first year we sold 350,000 dresses.”

With a nationwide sales team in place last year, that number soared to 625,000, and 1 million is the goal for 1986. Since Ellis, Inc. is currently in about 4,000 of the 10,000 independent outlets across the U.S. and only about sixty-five of the one hundred major department stores carry the line, there is ample room for growth even beyond the 1 million mark.

Indeed, Ellis’s start was so impressive that his investors now include some of the more recognizable names in the Dallas financial and retail community. His lead investors are Ted Strauss, former chairman of First City Bank in Dallas and now with the investment banking firm of Bear Stearns & Co.; John Sexton, executive vice-president of finance of The Lomas & Nettleton Financial Corporation; and Stanley Marcus.

Ellis believes the keys to success in the modern garment industry are management and a high level of computerization. Accordingly, he and his staff developed a sophisticated computer program to constantly monitor the disposition of each square foot of cloth, each order, and each design. They can also tell where each salesman stands and how each line is being received out in the field. The comprehensive data processing program also carefully manages every dollar. “A high level of productivity is essential for a domestic manufacturer to beat the foreign competition these days, but with the right data processing program you can do it and we are doing it,” he says.

Ellis is also a firm believer in constantly monitoring what is selling and dropping what is not. “It’s a proven statistical fact that 40 percent of the time you are going to fail, 40 percent of the time you are going to hit a mediocre stride, and 20 percent of the time you are going to hit home runs,” Ellis says. “We are determined not to fool around for long with anything other than a home run.”

To date Ellis has kept things simple. The company offers four labels representing four market segments. The flagship line is “missy’s” career dresses labeled “J. Ellis.” The others are a “J. Ellis Petite” career line, “Studio E” junior career dresses, and “J. Ellis, II,” larger-size career dresses. The firm entered the sportswear arena with the same philosophy and approach, and Ellis believes the venture into the much i larger sportswear market will power I the firm toward the S100 million I mark within two years.

Jim Ellis makes no secret of his I ambition to be one of the biggest and the best in women’s fashion in the nation. “1 just have no desire to be small and comfortable,” he says. That’s nice talk to hear in Dallas, where most business boasts have faded to an echo.



Who’s Down: Western Co.



If Eddie Chiles is mad as hell these days it’s no longer entirely because of liberal bureaucrats in Washington, D.C. These days he’s mad as hell about falling oil prices, prices that prompt his Western Company employees to ask when-not if-the | company is going to file bankruptcy.

In the late Seventies and the ear-ly Eighties, Chiles, who owns ap-| proximately 25 percent of Western’s | stock, borrowed heavily to finance a major expansion of the company’s I offshore drilling operations (which I in 1980 accounted for approximately 33 percent of the company’s total revenues). Chiles was betting, like most in the industry, that the price of oil was destined to go onward and upward, and that the healthy market for the drilling and servicing of oil wells would continue.

But as every Texan knows, it didn’t happen that way. World energy prices collapsed and so did Chiles’s cash flow. When oil prices began bouncing around in the low teens and then flirting with single digits, the Western Company’s cash flow fell so low that Chiles was forced to take Draconian cost-cutting measures to stay afloat.

The Western Company, founded forty-seven years ago, has had two primary profit centers. Number one has been contract offshore drilling. The company’s seventeen offshore rigs, purchased for around 15 million each, are leased to exploration firms throughout the world. Unfortunately for Chiles, cheap oil prices make offshore drilling a big money loser. With many contracts about to terminate, he faces the loss of even more cash flow as his rigs stand idle.

The second primary profit area for the Western I Company has been in oil field servicing, an activity that runs the gamut from supplying cementing and circulation services to contract drilling. In 1985 this segment accounted for nearly two-thirds of all Western Company sales. Again, as the price of oil tumbled, investment capital has fled from the industry, thereby causing a severe downturn in drilling. And very few deep wells! which are expensive to drill and expensive to service-are being drilled these days, contributing further to Western’s troubles.

Thus far. Chiles has worked hard to cut non-operating assets to meet current expenses. He has laid off long-time employees; he has imposed a 10 percent across-the-board pay cut; he has chopped his own salary by one-fourth; and he is working to sell the company’s handsome new headquarters in West Fort Worth.

However, even these steps did not provide I Chiles the maneuvering room he needed to keep the Western Company afloat. Currently, the company is carrying $422 million in debt classified as current, or due within the year, and an additional $173 million in long-term debt.

Late in April, the Western Company suspended interest and principal payments on its current debts and on some of its long-term debt. The company said it took the action to conserve cash, which now stands at $45 million, and Western officials will have until June 30 to renegotiate with creditors, according to an April 26 Wall Street Journal report.

In 1985, Western’s losses amounted to two dollars per share. E.F. Hutton predicts those losses will increase slightly to $2.05 in 1986-assuming Western survives in its present form. Western Company stock, which sold for an all-time high of 32 1/8 in 1981, fell to an all-time low of 3/4 last year.

The problems of the Western Company are certainly among the most immediate and severe faced by energy industry companies. Most analysts fear that a prolonged period of low energy prices could force a collapse of other key companies, thereby leaving the U.S. energy industry with little ability to “gear up” when oil prices begin to rise because of shrinking supplies.

What are the chances that Chiles will pull his Western Company through? When this issue of D went to press, Chiles’s lenders were still hanging tough, but the situation was looking grimmer by the day. One source inside the company predicted Western Company would be bankrupt before this story saw print. If Western’s bankers become convinced oil prices are down for the long haul, they will probably balk at any further restructuring of Western’s debt, almost certainly bringing on default. Maybe they already have.

Before Chiles became known as a man mad as hell about Washington liberals, he was visible as the man whose TV commercials suggested that if you didn’t own an oil well “you should get one.” Now those who followed that advice have something to be mad as hell about, too.



Who’s New: Cafe Margaux



Last year more than 300 new restaurants opened in Dallas; two out of three failed within a year. Probably no more than thirty of the Class of 1985 are still cooking today. Restaurants, while among the most seductive business ventures around, are perhaps the riskiest. Even the best thought out, the best executed, and the best managed may fail to please the public palate. Still, Dallas is a city that spends its money to eat out and there seems no end to the entrepreneurs willing to take the restaurant risk.

The high failure rate among Dallas restaurants is nothing new to Tom Agnew, proprietor of the ten-month-old Cafe Margaux. He’s been taking risks with Dallas palates-and losing-for years. His first venture, Agnew’s, offered top-priced provisions and the lulling sounds of a string quartet in the background. Despite applause from critics, the restaurant lasted less than three years. Critics and customers alike shunned Agnew’s second location, which closed after thirteen months and a $30,000 loss.

Why? Location, for one reason. Agnew’s first eatery was located in the star-crossed Adelstein’s Plaza, the shopping center that was supposed to dazzle in the heart of a new Rodeo Drive, but turned into one of the city’s more glaring commercial flops. The second Agnew’s was in the Promenade Shopping Center in Richardson, which proved incapable of sustaining a white-tablecloth establishment.

Another reason for the failure of both ventures was, in Tom Agnew’s words, “. . .management that was not what it needed to be. This is as tough and competitive a business as you can find, especially in Dallas. You can’t slip up anywhere, and we slipped up in lots of places. But,” he insists, “we’ve finally hit the formula. Cafe Margaux is minting money.”

The “we” in Agnew’s statement includes his wife. Kay, who runs a catering business on the side and owns half of the new venture with her husband. Cafe Margaux, named after the Agnews’ five-month-old daughter, has indeed been a smashing success. Located in a Lovers Lane shopping center, the restaurant originally offered a mere twelve tables and had no liquor license: its affluent patrons had to BYOBordeaux. Even so, Agnew’s new venture brought in more than $600,000 on the original $19,500 investment last year. The Cajun cuisine and the small, neighborhood atmosphere proved so popular that Agnew expanded, leasing adjoining space with room to add eight new tables and a bar area.

One day, while he was between ventures and staring bankruptcy in the face, Agnew rode his bike past a struggling cafe and struck up a conversation with the owners. Soon he had a demographic dream nestled among affluent residential areas like the Park Cities, Preston Hollow, and the ultra-hot yuppie area between Lovers and Northwest Highway, west of the Tollway. “It was perfect to have folks stroll in from the surrounding area,” he says.

The menu was to be high-quality Cajun featuring crayfish, blackened redfish, and seafood enchiladas, and prices were to be affordable. Agnew had learned that competing with the established, super high-end restaurants was tough. His formula with Cafe Margaux was to combine relaxation, informality, good food-and low overhead.

Thus far, the formula works. Almost any afternoon the twenty tables are filled by 6 p.m. By eight the second wave has hit and a waiting line is beginning to form outside the door. On weekends the wait can be an hour.

Agnew’s decision to expand and get a liquor license brought mixed reviews from steady customers who have followed him through all three ventures. Many feared a larger Cafe Margaux would lose its charm. Others felt that bringing their wine added to the ambience. But most customers seem to feel that despite the changes, the intimacy of the original 975 square feet has been preserved.

With location and management problems solved (either Tom or Kay is on hand to supervise every night), the Agnews may have found the right ingredients for a successful Dallas restaurant. They’re hoping they don’t lose the recipe.



Who’s Through: Dr Pepper



According to executives at both Dr Pepper and Coca-Cola it’s a done deal: Dr Pepper, one of Dallas’s landmark business enterprises, will soon become part and parcel of the mammoth At-lanta-based soft drink firm. The only possible hitches are problems with the Federal Trade Commission’s approval of the deal and any trade lawsuits that might be filed by a competitor like Royal Crown Cola.

Dr Pepper has been an ongoing Dallas drama over the past few years: The Success Story. The Sudden Near-Bankruptcy. The Leveraged Buyout. The Turn-Around. And now, it seems, the closing act: The Merger. Let nobody think that Coca-Cola has swallowed an inferior product gone flat. Leading soft drink industry analysts, including Joe Doyle of Smith Barney Inc., have expressed considerable surprise at Dr Pepper’s recent showing. Most analysts, including Doyle, expected the company to be much less aggressive after going private. The common wisdom held that Dr Pepper’s considerable debt service would prohibit management from making the bold marketing and promotional efforts needed to hold Dr Pepper’s market share in the face of tough competition, especially from Coke and Pepsi. Dr Pepper did well enough to post an increase in its market share from a 1984 level of 6.1 percent to a 1985 level of 6.5 percent.

Doyle pinpoints two reasons for Dr Pepper’s surge. First, declining interest rates helped by reducing debt service. Second, Dr Pepper management was determined to play for the “long haul” instead of trying for a quick return by maximizing profits at (he expense of investment.

Industry analysts were not so surprised at the decision of Coca-Cola to tender an offer for Dr Pepper, because rival Pepsi Cola had already made an offer for another famous soft drink manufacturer, 7-Up. With a successful acquisition of 7-Up’s 6 percent to 7 percent of the domestic soft drink market Pepsi would have increased its own share to nearly 35 percent, just a few percentage points shy of King Coke’s 38 percent. Most analysts believe it was Coca-Cola’s fear of Pepsi’s matching its weight that led Coke to bid for Dallas’s Dr Pepper.

Both Dr Pepper and 7-Up were good buys for the companies that acquired them. Nearly one-third of all 7-Up is already bottled by Pepsi bottlers. More than 40 percent of all Dr Pepper is bottled by Coca-Cola bottlers. “The two have natural fits,” explains Doyle. However, other analysts point out that Dr Pepper has never done that well in the overseas market. By contrast, 7-Up is growing abroad.

Another factor prompting the Coca-Cola/Dr Pepper merger is certainly the lackluster performance by Coke’s own Dr Pepper clone, Mr. Pibb. Named after an undertaker in a grade B horror flick, The Night Phantoms (the town’s doctor was, you guessed it, Dr Pepper), the Dr Pepper taste-alike just never seemed to catch on. Doyle says there is “no question” that Coca-Cola will drop its Mr. Pibb line and go strictly with Dr Pepper.

Unfortunately for the merger-makers, the FTC is more than a little concerned that the two acquisitions would leave two soft drink companies in control of nearly 80 percent of the total market. Doyle thinks the odds are better than fifty-fifty that the feds will say no to the deal.

Coca-Cola spokesman Larry Franck and Pepsi governmental relations manager Bill Ehrig both disagree. They say that soft drinks are only part of the “total market” and that their companies are actually fighting on many fronts, selling beer, wine, bottled water, coffee, and tea between them. “You also have to look at the world market, not just the U.S. market, and we are coming up against some pretty fierce competition from the Canadians and the Japanese,” says Ehrig. Both executives believe that the FTC will allow the merger, though Franck anticipates a lawsuit from “some U.S. competitors.”

Will Coca-Cola dare to alter a Dallas icon? “I really don’t think it’s proper to comment too much on plans at this time, but I certainly wouldn’t anticipate that any of the major functions of Dr Pepper would move from Dallas.” says Franck. “Dr Pepper is a Dallas institution and we wouldn’t want to change that.”

Doyle believes a Coca-Cola takeover of the Pepper would be a big plus for the Dallas area. He expects Dr Pepper will now get the marketing support it needs to gain a larger market share. “Growth of the product’s market will be good for the Dallas branch of Coca-Cola,” explains Doyle. He’s probably right, but it’s still hard to swallow losing one of our own to Atlanta.