Dylex Limited

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Dylex Limited

637 Lake Shore Boulevard West
Toronto, Ontario M5V 1A8
Canada
(416) 586-7000
Fax: (416) 586-7277
Web site: http://www.dylex.com

Public Company
Incorporated: 1967 as Dylex Diversified
Employees: 11,500
Sales: C$1.07 billion (1998)
Stock Exchanges: Toronto Montreal
Ticker Symbol: DLX
NAIC: 45211 Department Stores

One of the leading specialty retailers in Canada, Dylex Limited operates five retail chains that cater to distinct market segments. In 1999, the five chains comprised 640 stores, including 284 BiWay units, 113 Thrifty’s units, 109 Tip Top units, 74 Fairweather units, and 60 Braemar units. Additionally, Dylex operated two menswear manufacturing businesses, Weston Apparel and San Remo Knitting Mills, as a facet of its Tip Top business. The company recorded explosive growth during the 1970s and 1980s, operating 17 chains and more than 2,700 stores in the United States and Canada at its peak. By the mid-1990s, however, Dylex was staving off bankruptcy and had confined its presence within the borders of Canada. One of the company’s signature traits throughout its history was an emphasis on maintaining sharply focused, niche-oriented stores that catered to a specific market segment. This characteristic endured into the late 1990s. BiWay operated as a neighborhood-based discount concept offering a narrow range of general merchandise, food, health-and-beauty aids, and family apparel. Braemar sold classically styled fashions targeted for career women over 35 years old. Thrifty’s ranked as Canada’s leading jeanswear chain, selling moderately priced casual denim and denim-related clothing. Fairweather stocked fashion apparel for younger, contemporary working women. Tip Top, Dylex’s original chain, sold men’s clothing, suits, sportswear, and accessories. More than half of Dylex’s stores were located in Ontario, with the remainder scattered among the country’s other provinces.

Origins

The first discussions concerning the formation of Dylex took place during a lunchtime meeting in December 1966. On one side of the table sat Jimmy Kay, a Toronto-based entrepreneur with business interests in housewares, plastics, and lighting. On the other side sat representatives of the Posluns family, who for three generations had been involved in the Toronto garment industry. The Posluns and Kay had never met each other prior to the meeting—an auditor who worked for both Kay and the Posluns had arranged the meeting—but they were both interested in acquiring the same company, Tip Top Tailors. Founded in 1909, Tip Top Tailors was a once healthy chain of men’s apparel stores that had lost its luster by the late 1960s, deteriorating into “an old, broken-down chain,” according to Toronto broker Donald Tigert. From their perspective, the Posluns had little interest in whether Tip Top Tailors was profitable or not—they were interested in the company’s five-story building. They had approached Tip Top Tailor’s owners, the Dunkleman family, about buying the building, but the Dunklemans declined the offer, wishing to sell the entire business if they sold it at all. Kay was more interested in buying the chain of stores than he was in purchasing the headquarters building, a proposition the Dunklemans also rejected. Separately, each side had failed in their bid to acquire Tip Top Tailors, but during the course of lunch they agreed to pool their efforts and offer the Dunklemans what they wanted. Thus began a business relationship that would endure for the next quarter century.

The Dunklemans agreed to the joint bid by the Posluns and Kay, who formed a new company named Dylex, which concurrently went public, to serve as the holding company for Tip Top Tailors. The name Dylex, which had once been used by Kay for one of his holding companies, was an acronym for “damn your lousy excuses,” a phrase that reflected the mentality of the company’s new management. Kay and the dominant Posluns family member, Wilfred Posluns, established a reputation for acquiring ailing retail chains and injecting them with new life, a characteristic of their jointly controlled company as it developed into a retail giant. Tip Top Tailors was the first example of a rapid turnaround, a company whose former executives offered numerous reasons for its anemic performance, none of which were accepted by Kay or Posluns. Instead, Dylex management applied what one industry pundit characterized as a “don’t-stand-for-any-nonsense” style of management, sharpening the chain’s focus on its target clientele. In its first year under Dylex control, the floundering 52-store chain regained its lost vitality, registering C$37 million in sales by the end of 1967.

Tip Top Tailors was the first instance of Dylex’s healing touch, the first of many to follow, but behind the numerous success stories of retail chains turned into market winners was an important, often overlooked, component of Dylex’s business. From the start, the company was diversified, maintaining retail and manufacturing operations. Although the manufacturing segment of Dylex kept a low profile because it produced clothes for both Dylex chains and competing chains, it was a significant contributor to the holding company’s financial health, accounting for approximately 25 percent of Dy lex’s revenue volume. Perhaps more importantly, the manufacturing side insulated the company from the cyclically of its retail operations, a function the retail segment also performed when apparel manufacturing experienced a downturn. Equally as important to the company’s early success was the acquisition strategy employed by Kay and Posluns. The pair prided themselves on not only acquiring the physical assets of retail chains but also the executives who managed the chains. “We wanted to bring in dynamic, entrepreneurial types,” Kay explained, “who were inventive and had a good knowledge of the local market.” By retaining quality executives gained through acquisitions and giving them considerable managerial freedom, Dylex developed an autonomous corporate structure, with each of the chains managed like entrepreneurial businesses. Dylex, operating in the background, gave each of its chains “the benefits of a large corporate sponsor, providing capital and corporate services, but chains were largely responsible for using such services to their advantage.

The effect of a diversified presence in both manufacturing and retailing and delegating responsibility directly to store managers made for a balanced corporation unfettered by superfluous layers of management. Operating as such, Dylex recorded explosive growth during the 1970s, adding new chains through acquisitions during an era when the number of urban shopping centers in Canada proliferated. By the end of the 1970s, an estimated C$12 of every C$100 spent on clothing in Canada went to a Dylex-controlled store or manufacturer.

The acquisitions completed during Dylex’s first decade of operation added a number of different retail chains to a portfolio anchored by Tip Top Tailors. The Dylex chains included Fairweather, Braemar, Suzy Shier, Thrifty’s, Ruby’s, Town and Country, Harry Rosen, Big Steel Man, and BiWay. Dylex’s manufacturing operations included Manchester Children’s Wear, Nu-Mode Dress, Paulman International, Forsyth Group, Canadian Clothiers, Tobias Kotzin, and Target Apparel. Combined, the entire Dylex empire generated more than C$650 million a year during the early 1980s, representing a prodigious leap from the total collected in 1967. The company ranked as Canada’s premier retailer, but was largely unknown to many consumers, operating as the anonymous giant overseeing a stable of profitable chains. Apparel industry experts were aware of Dylex, however, attributing the success of Tip Top Tailors and its sister companies to the watchful eyes of Kay and Posluns. Although the Dylex chiefs granted their subsidiary com panies considerable freedom, they were adamant that specific rules were obeyed. First, Kay and Posluns set specific sales goals, establishing benchmark figures that store managers were duty-bound to meet—with no excuses accepted. Second, and perhaps most importantly, Kay and Posluns demanded that each of its chains identify a specific, narrowly defined customer base and tailor their stores for such potential customers. Big Steel Man, for example, catered exclusively to 18- to 22-year-old males who were either college students or first-job young professionals. By maintaining a tight, niche-oriented focus for each of its chains, Dylex management had blanketed the Canadian retail market in little more than a decade, reaching nearly every demographic sector. Because of this successful approach, projections called for the company to reach C$1 billion in annual sales by 1987.

Company Perspectives:

To differentiate ourselves in the marketplace, we must focus and target our markets very precisely. Each one of our businesses must understand who its customers are, and serve those customers exceptionally well in order to dominate its niche markets and expand the base. All our businesses are geared to the middle market —primarily within major urban and suburban areas. But none are making the mistake of trying to be all things to all customers.

Expansion into the United States in the 1980s

With its position secure in a variety of market segments, Dylex turned its sights southward as the mid-1980s began and plotted a move into the United States. The potential rewards for such a foray were enticing, by far eclipsing what the company could glean in Canada, no matter how many stores it operated. In Canada, the specialty apparel and accessories industry registered C$8.2 billion in sales a year. In the United States, the same industry boasted $70 billion annually, presenting Kay and Posluns with a potentially lucrative challenge. They made their entry into the United States in a typical manner, acquiring the floundering Foxmoor women’s apparel chain from Melville Corporation, a large U.S. specialty retailer, in 1984. Dylex paid C$49 million for the 614-store chain and quickly applied its restorative touch. The stores were redesigned and stocked with all new merchandise in an effort to refocus the chain on its specific market segment: young women who preferred color-coordinated apparel and accessories. After a year, sales increased 30 percent, and Dylex had secured a sizeable presence in the vast U.S. market.

Expansion, from the start, had been financed by mid-term debt and substantial cash flow, enabling the company to purchase one chain after another. The widening breadth of Dylex also had been aided by the company’s practice of only acquiring a portion of its investments, preferring to enter into a partnership that gave Dylex a 50 percent interest in a particular chain. The remaining half of the business was generally owned by the executives in charge, an arrangement that strengthened the entrepreneurial backbone of the company. Chains such as Tip Top, Braemar, and Fairweather were wholly owned by Dylex, but most of the company’s subsidiaries were partnerships by the mid-1980s. As the company moved forward after its acquisition of Foxmoor, it increased its presence in the United States by acquiring retail chains in partnership with other parties. The Foxmoor purchase was followed by the acquisition of 50 percent of National Brands Outlet (NBO), a 14-unit, men’s discount clothing chain located in the New York metropolitan market. Next, Dylex invested in Wet Seal, a California-based junior fashion chain. The stake in Wet Seal was followed by an acquisition no one in the U.S. retail apparel industry could ignore. Dylex, still relatively unknown in the United States, purchased one of the leading specialty chains in the country, acquiring Brooks Fashion, a national chain with 670 stores operating under the names Brooks, T. Edwards, and Onstage. Entering the late 1980s, Dylex was an unmitigated retail giant. The company owned or partly owned 17 chains that operated more than 2,700 stores in the United States and Canada. Kay, who served as chairman, was brimming with confidence, projecting that Dylex would be a “C$4- or C$5-billion company by the end of the 1980s.”

Tumultuous 1990s

For Kay and Posluns, who served as president and chief executive officer, the mid-1980s would be remembered as Dylex’s golden years. Following their triumphant invasion of the U.S. market, the company began to suffer, at first only acutely, and then chronically. Problems quickly surfaced with the company’s stake in Brooks Fashion, one of the few acquisitions in the company’s history in which Dylex held a minority interest. Brooks was controlled by managers who, according to one analyst, “became very wealthy and weren’t that interested in running the business.” Profitability plunged and debt mounted at Brooks Fashion, its affect on Dylex exacerbated by other disappointing results registered by some of the company’s other chains. At first, industry pundits brushed aside any concern of profound problems at Dylex. “The Dylex people have been through this many times,” remarked one analyst, “if anyone can turn it around, they can.” The problems persisted, however, aggravated by the pernicious economic conditions that emerged as the 1990s began. Kay departed, and Posluns was left at the helm of what was regarded as a sinking ship.

The recessive economic climate of the early 1990s inflicted significant damage upon the retail industry as a whole, and delivered a particularly harsh blow to Dylex. Between 1989 and 1994, the company accumulated losses of roughly C$150 million, putting Posluns, who served as chairman and chief executive officer, in an untenable position. Shareholders were distressed, particularly one group of U.S. investors who demanded a change in the directorship of Dylex, which was dominated by members of the Posluns family. By the end of 1994, the sprawling mass of Dylex had been winnowed down to 879 units in Canada and 174 units in the United States through divestitures and store closures, with further reductions in the offing. NBO, which had grown to 34 stores, was sold in early 1995 to Essex Holding, Inc., a divestiture that was indicative of a company in retreat. The sale of NBO, according to a Dylex official, was “consistent with [Dylex’s] view that it can achieve more attractive returns by investing in its Canadian operations.” Roughly a week later, the company hit bottom. Saddled with C$235 million of debt to creditors, Dylex filed for protection from creditors while it reorganized, declaring bankruptcy a decade after it had promised to dominate the North American specialty retail industry. Several days later, Posluns announced the closure of 200 stores in Canada as part of a sweeping restructuring.

After filing for the equivalent of a Chapter 11 in the United States in January 1995, Dylex emerged from bankruptcy in April 1995, ready to embark on the long road toward recovery. In July 1995, the expected change in management occurred. Wilfred Posluns as well as David Posluns, the company’s chief financial officer, stepped down, making room for a new era of management. Elliott Wahle was named president and chief executive officer. Wahle, a former director of player personnel for the Toronto Blue Jays, had served as president of Toys ‘R’ Us (Canada) Ltd. before taking on the task of leading Dylex toward recovery. Under Wahle’s direction, the company focused on improving its infrastructure, which had deteriorated after years of neglect. In effect, Dylex attempted to do to itself what it had done to numerous other retail chains throughout its 30-year history. Underperforming units were closed, several divestitures were completed, and funds were directed toward capital improvements. By March 1997, there was tangible evidence that Wahle had succeeded. During the previous year, the company had registered C$22.8 million in profits, nearly eight times the total it posted in March 1996. The results represented Dylex’s most profitable performance since 1988.

As Dylex prepared for the 21st century, it did so from a solid financial foundation that positioned the company for growth. Although the company did not contemplate completing any acquisitions during the late 1990s, growth—achieved internally—stood as its primary objective. In 1998 Dylex spent more than C$44 million on its continuing effort to upgrade stores and to expand its existing chains. In 1999 the company anticipated devoting an equivalent sum to enhancing its portfolio, particularly its BiWay and Thrifty’s chains, which were slated for renovation. Although the company had been forced to reduce its size considerably during the 1990s—paring down to 640 stores in 1999—it continued to rank as one of Canada’s largest retail concerns, a stature Wahle intended to maintain in the future.