LiL' Things, big problems

Why no one is winning the battle of the baby superstores

It didn't take long for Baby Superstores, which had been around for several years, to make its mark on Wall Street. Less than a year after the Mesquite stores opened, Baby Superstores issued an IPO--opening at a share price of $18, closing the same day at $34.25. Within four months, the stock was trading at a high of $58.

But Tate, much to the glee of LiL' Things' founders, had only short-lived glory with investors.

"We should have been more skeptical," a Forbes magazine writer said after the stock nosedived 29 percent in February 1996. The plunge occurred after news hit that Tate had overstated the company's cash reserves by $3.9 million, and therefore needed to refigure 1995 profits--which were ultimately slashed by $2.5 million. The company described the accounting error as "human" and "procedural."

For LiL' Things, however, the revisions meant that all of Baby Superstores' sales figures were probably inflated, Steagall says. "We were operating under the assumption that he was doing 50 percent more volume that he probably was," Steagall says.

Before the more accurate picture of Baby Superstores' finances emerged, however, the LiL' Things team had completely reworked its business plan to reflect the aggressive competition. The goal became build, build, build before Tate does, primarily because they believed Baby Superstores was making money based on what was later revealed to be erroneous information.

"It forced the company to grow faster," Steagall concedes. "If you didn't grow, you were a sitting duck. You had to open stores so he couldn't keep up with you. Eventually, one hoped, his board would force him to do the rational thing."

When Daryl Lansdale arrived at LiL' Things earlier this year, no one was talking about expansion plans anymore. He simply presided over the mop-up. "I have never seen anything in quite such disarray," he says.

Lansdale won't dish the dirt on how his predecessors fouled up. But former customers of LiL' Things are eager to point out the flaws.

In fact, Tracey Houlditch remembers precisely the moment she stomped out of the LiL' Things store in Plano and swore she'd never come back. Her son, a sweet-faced brunette with a mop that could have been worn by a Beatle, had gotten a haircut at the store's barbershop. They'd done what she thought was a sloppy job. Houlditch believed the uneven cut reflected general problems with LiL' Things' service. It was "horrible," she says. "Very disorganized. No one ever knew anything. Clothes were on the wrong racks. It was a mess."

Facing such problems and knowing investors weren't ready to serve up more cash, Lansdale tried to plead for mercy from suppliers who could offer credit and keep the company operating a while longer. But by last month, all options had fallen through. Having surveyed the aftermath closely, Lansdale contends--and even Steagall doesn't really argue otherwise--that the whole concept of LiL' Things was flawed.

Charles Steinbrueck, who runs Retail Venture Partnership in Denver, also shopped the idea of starting a baby-goods retail chain to investors at roughly the same time LiL' Things began. As a onetime potential competitor of Steagall and Tate, the Denver entrepreneur characterizes the LiL' Things team's complaints about Baby Superstores as mere whining. "That's reality in the retail business," he says.

But Steinbrueck also believes Tate overstated his profits and skewed the economics of the market. "It was smoke and mirrors," he says of Tate's high-flying days.

When pressed, Lansdale will nitpick about some of the prior management's sins of omission. Too many stores were located in each designated city, for instance. LiL' Things hired clerks who were too young, alienating new parents. Who wants to hear a gum-chewing teenager expound on baby care? Precious advertising dollars also were spent unwisely. The focus of the campaigns was on price, when people wanted to see selection.

In its haste to catch up with the artificially inflated success of Baby Superstores, LiL' Things' concept had become so much of a hybrid that, in the end, there was no recognizable concept. It wasn't a high-end store, yet it wasn't a discount outlet either.

One point on which Lansdale and Steagall agree is that the baby-producing population is not a loyal bunch. They may buy an extravagant crib for the first-born--spending, on average, $6,000 to $8,000 on the first child. But they've scaled way back by the time the second one comes along.

"With the first child, we were quite successful," Steagall says. "But with the second child, reality sets in that they don't need to wear all those cute little clothes."

Despite his reckoning with Wall Street, Tate has emerged from the baby wars with many millions. In October 1996, he sold his chain to the owner of Toys R Us, personally reaping about $150 million in profits. LiL' Things team members reacted sourly to the news. They believe--and almost seem to hope--that Tate had to discount his own shares in order to make the sale because he'd previously misreported his financials. Tate did indeed sell his shares at a discount--$14.87 per share--while other shareholders received $23.45 for their stock. Even so, it wasn't a bad deal for Tate, who bought his stock at five cents a share.

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