Want to be a millionaire?  You could be, if financially troubled Whitehall Jewellers hired you to be their CEO. 

 

Twice this fall, Whitehall’s board has extended multi-million dollar offers to talented jewelry industry executives, if they would agree to be Whitehall’s chief executive officer.  One executive accepted, then rejected the board’s offer.  A second executive has accepted the board’s offer, and is slated to show up for work this week.  But, if he doesn’t work out, there’s always the chance that Whitehall’s board might again search the market for the next potential millionaire-wannabe. 

 

Personnel Turnover High at Whitehall

At Whitehall Jewellers, personnel turnover among upper management has been high, especially over the past few years.   IDEX Online Research began to notice increased turnover in during 2003, likely precipitated by the following series of events: 

 

• 2003 – Whitehall is hit with three punches in rapid succession:
  • Capital Factors alleges that Whitehall committed fraudulent acts in its relationship with bankrupt Cosmopolitan Gem, one of Whitehall’s major suppliers.   
  • The New York Attorney General’s office announces an investigation of Whitehall. 
  • The Securities & Exchange Commission (SEC) begins a formal investigation of Whitehall. 

• December 2003 – Whitehall’s chief financial officer and its executive vice president of merchandising are terminated.  Whitehall misses the deadline for filing quarterly legal documents with the SEC.

• 2004 – Because the company must deal with its legal problems and personnel turnover, management focus on store operations languishes.  Same-store sales turn negative in the July 2004 quarter, a trend that continues today. 

• September 2004 – Whitehall reaches a settlement in the Capital Factors litigation.  The New York Attorney General’s office says it will not file charges.  Regarding the SEC investigation, the company noted that, among other things, it had terminated the employment of all personnel it determined had engaged in misconduct, hired an Internal Audit Director and authorized the hiring of a general counsel, committed to hiring a president and a COO (chief operating officer) with significant public company experience, and taken measures to increase the board’s independence. 

• December 2004 – The company hires Lucinda Baier as its president and COO , reporting to Chairman Hugh Patinkin,.  Baier comes from Sears where she was a senior vice president and general manager.  In addition, she served in senior positions at major retail corporations, including Sears and US Office Products, and other Fortune 500 companies as well as Arthur Andersen & Co.  She becomes Hugh Patinkin’s right-hand person on a day-to-day basis. 

• December 2004 – The company’s executive vice president resigns, and his duties were assigned to Baier. 

• December 2004 – Before  Baier’s arrival, Whitehall had already begun trying to reposition the company as a higher-end jeweler, away from the mass market.  The company’s 2004 holiday catalog was a dramatic change from previous years, and differentiated the company from other mass market jewelers.  Unfortunately, the repositioning apparently confused consumers, and the company reported a same-store sales decline of 9 percent during the all-important holiday selling season. 

• Late 2004 – As part of the move to reposition the company, management began a program to sell up to $70 million worth of inventory – roughly one third  of its total merchandise – at distress prices, so cash could be generated for purchasing new goods.   

• March 2005 – Just when the company should have begun focusing on strategies for 2005 and 2006, its chairman, Hugh Patinkin, passed away suddenly as a result of heart arrhythmia; Patinkin had been in good health.  Patinkin’s passing left the company without a clear leader.  While Baier was being groomed to lead Whitehall, she apparently was  deemed too inexperienced to take over as chairman.  Further, her brushes with investors were often unsatisfactory. 

• March 2005 – Dan Levy, a long-time Whitehall board member and experienced retail merchant, is named chairman of the company.  Levy was chairman of Best Products in its final days, and he has had significant experience with troubled situations. 

• April 2005 – The company announces it will delay financial reports to the SEC; some subsequent reports were also delayed. 

• April 2005 – Newcastle Partners, a Dallas-based investment firm that invests in under-performing companies and then seeks to turn them around, announces that it holds a 14.5 percent stake in Whitehall.  Newcastle announces its intention to seek seats on the company’s board. 

• July 2005 – Dan Levy steps down as Whitehall’s chairman, but remains on its board.  Steven Pully, of Newcastle Partners is named chairman. 

• August 2005 – Whitehall announces the hiring of jewelry veteran Beryl Raff as CEO and a member of the board of directors.  Raff is an industry veteran who has experience with department stores, Zale Corporation (where she was briefly chairman ), and J.C. Penney.  While she left Zale under an unjustified cloud, she has forged ahead and helped build J.C. Penney’s jewelry operation into a major contributor.  Raff is an impressive merchant, and she is one of the few people in the jewelry industry who could potentially turn Whitehall around, if it can be done. 

• August 2005 – Lucinda Baier steps down as CEO, but remains as president. 

• September 2005 – Raff resigns from Whitehall before she even shows up for work.  While the details are not public, clearly there was a communication error between Whitehall and Raff.  Fortunately for Raff, Penney welcomed her back with open arms and gave her a promotion. 

• September 2005 – Whitehall receives a default letter from its bank lenders.  Whitehall discloses it is running low on cash. 

• October 2005 – Lucinda Baier resigns, and Dan Levy assumes the title of interim CEO of Whitehall.  Under the terms of her employment agreement, it appears that Baier will receive approximately one year of compensation. 

• October 2005 – Whitehall Jewellers Inc. agrees to swap as much as 87 percent of its equity and a majority of board seats in exchange for financing from an investment fund.

• October 2005 – Whitehall receives notice from the New York Stock Exchange that it is not in compliance with exchange requirements, and it will likely be de-listed.  Over the past 12 months, Whitehall (JWL) shares have sold for as high as $8.95, but declined to as low as $0.75 per share recently. 

• October 2005 – Whitehall receives a bid to buy the company for $1.10 per share from Newcastle. 

• November 2005 – Robert Baumgardner is hired as president of Whitehall.  Baumgardner was serving as president of the Little Switzerland jewelry chain, a subsidiary of Tiffany & Co. 

• November 2005 – Whitehall plans to close 77 stores, or about 20 percent of its 387 units. 

 

IDEX Online Research raises an interesting question: given this sequence of events, is $1 million enough of an enticement to run this troubled situation? 

 

Employment Contracts Differ Materially Between Raff & Baumgardner

IDEX Online Research has obtained copies of the employment agreements of both Raff and Baumgardner.  While the company pegged both of their salaries at $500,000 annually, the terms of their employment differed materially, as the following table illustrates.

Jewelry Industry CEO Compensation Varies Widely

Essentially, Whitehall offered each candidate a salary of $500,000 plus bonuses, for a package worth $1 million or more during the first year.  How does this compare with others in the industry? 

 

As the table below illustrates, Hugh Patinkin was making a salary of $525,000 when he passed away.  Because Whitehall did not meet its financial goals in FYE January 2005, Patinkin was not paid a bonus.  In the prior year, he received a $75,000 bonus. 

 

In another troubled situation, Mayor’s Jewelers’ president Tom Andruskevich receives a salary of $500,000 annually (Andruskevich receives additional compensation related to his duties at Birks).

 

IDEX Online Research notes that 2004 was generally a poor year for executive compensation in the jewelry industry.  In the prior year, many of the executives listed below earned a bonus of nearly equal to their salary.  In addition, each of these executives receives additional compensation which can include stock, stock options, insurance, and other benefits. 

 

Did Raff & Baumgardner Get Big Raises To Entice Them to Come to Whitehall?

Before their offers from Whitehall, how much were Raff and Baumgardner paid?  It is not possible to obtain detailed employment agreements of either candidate, but legal filings reveal some historical financial arrangements.

 

• Beryl Raff – In 2000, as chairman of Zale, Raff received a salary of $600,000 and a bonus of $690,000 plus other compensation.  However, her predecessor, Bob DiNicola, received a $1,000,000 salary and a $1,100,000 bonus in 1999.  At J.C. Penney, her compensation was less than $725,000, the legally required cut-off for reporting salaries of top executives. 

 

• Robert Baumgardner – In 2001, Baumgardner received $285,000 salary plus a $100,000 bonus plus a $181,000 retention payment and other compensation as president of Little Switzerland, when it was a stand-alone public company.  His salary was subsequently raised to $300,000.  At Tiffany, he made less than $397,000, the legally required cut-off for reporting salaries of top executives at that company.