Suitcase Full of Blues Samsonite used to be the 800-pound gorilla of the luggage world--until it became an endangered species.
By Kevin Kelleher

(Business 2.0) – Things really got bad after they fired Oofi the gorilla. ¶ When Samsonite bought American Tourister in 1993, it also took proud ownership of a legendary ad campaign: Oofi savagely hurls a suitcase against the bars of its cage while the bag's contents stay serenely intact. An iconic statement if ever there was one.

At first, Samsonite loved the gorilla, but in 1996 a new CEO showed up with improbable plans to turn the battle-scarred and debt-laden luggage maker into a growth company. The new Samsonite would need a new image, so the gorilla had to go. "You could say I'm getting the monkey off my back," CEO Richard Nicolosi quipped to the Wall Street Journal at the time.

How wrong he was. True, Samsonite's stock did flirt fleetingly with the $50 level after Nicolosi--a proud protege of "Chainsaw Al" Dunlap--laid off hundreds of employees and reorganized the company's sales channel. But within two years, a series of missteps and misfortunes had driven the stock price below $5, sending Nicolosi packing and leaving Luc Van Nevel, a 28-year veteran of the firm, to manage the recovery.

Samsonite's revenues for its fiscal year that ended in January were $744 million, up just 6 percent from five years ago. During that period, the company racked up $285 million in losses. Van Nevel has now crafted a recapitalization package. If that fails, the company could face bankruptcy.

"They've been operating with a meat cleaver over their heads," says Eric Beckman, a managing director at Ares Management, which would control 28 percent of Samsonite under the recapitalization plan. "But the company's a real fighter, a real survivor. It's finally in a position where it can do very well."

So how did one of the world's largest luggage makers with one of America's strongest brands end up on the endangered species list? This is, after all, the company that revolutionized luggage not once, but twice--first with a low-cost alternative to leather in the 1940s, just in time for the postwar boom, and again in the 1960s with those molded plastic suitcases that were virtually indestructible, even by the likes of Oofi. Though it retains the panache of a premium brand in Europe, however, Samsonite has seen its brand fade at home as dozens of rivals, from Tumi to Louis Vuitton, claw for recognition in an ever competitive market.

Samsonite lays much of the blame for its recent problems on factors beyond its control: 9/11, the war in Iraq, the global SARS scare. The luggage business is a little-noted victim of the severe travel slump that has left hotel suites vacant and airlines in search of bailouts. "We were hurt every bit as much as the airline industry," says Tom Sandler, head of Samsonite's Americas operations.

Marion Jones, executive director of the American Luggage Dealers Association, agrees: "We've seen a lot of companies fall by the wayside. Things have got to settle down--in the Middle East, in Asia with SARS, even the tensions with France and Europe--before it gets better."

But the company's worst problems go back further than Sept. 11, 2001. In the 1980s junk bond era, leveraged-buyout specialists Kohlberg Kravis Roberts, aided by Drexel Burnham Lambert, seized control of Samsonite and its parent, Beatrice Foods. After junk bonds crashed, Samsonite was rescued from bankruptcy by the likes of Carl Icahn and Leon Black, a Drexel alum.

Black brought in Nicolosi, who, besides dumping Oofi, raised wholesale prices, forcing retail shops and department stores to pass these costs along to consumers. Then he nearly doubled the number of branded shops in outlet malls that sold the bags at close to wholesale prices, further pressuring the retailers.

Samsonite's customers rebelled, and its losses skyrocketed. Soon two of the company's major stockholders--the Artemis group, controlled by French billionaire Francois Pinault, and Black's Apollo Advisors--decided they wanted out.

Goldman Sachs, among others, was hired to sniff out buyers, but there weren't any. So in 1998 Samsonite again turned to junk bonds and bought back half its shares at $40 a share, a 38 percent premium over the market price.

Samsonite was back where it began the decade--smothering under debt. "We went from a company in great financial health to one that was highly leveraged. We were paying a lot of money in debt service. We lost sales from customers who couldn't do business with us because of our credit profile," Sandler says. "It was very frustrating."

Van Nevel thus has had the grim task of righting a debt-laden vessel in turbulent waters. First he slashed unprofitable operations, closing some manufacturing and distribution facilities, shuttering poorly performing retail outlets, reducing the company's risk from its unlikely move into high-fashion shoes, and cutting headcount nearly 25 percent. Van Nevel also took advantage of lower-cost overseas labor: Samsonite makes its hard-sided suitcases at plants in China and India and contracts out 80 percent of its other baggage to firms in Eastern Europe and the Far East. Finally, the company muscled into new markets with casual bags, backpacks, and computer cases, which together now make up more than 20 percent of its annual sales.

So far, the results have been impressive: In the face of stagnating revenues, Samsonite last year posted its first net profit in five years ($3.3 million before interest payments, but a loss of $40 million if they're included), and its market share has edged up about 3 percentage points in the past few years, to 26 percent in the United States and 28 percent in Europe, according to Deutsche Bank.

Another danger still lurked, however: a time bomb in the 1998 deal that greatly accelerated interest payouts in June 2003. Samsonite raced the clock to tailor a new recapitalization program to swap the junk bonds for common stock and renegotiated loans.

In May, with the stock trading below $1 despite a five-year struggle to recover, Samsonite's auditors at KPMG ominously warned that if debt restructuring didn't go through, Samsonite would default on payments and face "significant doubts about the company's ability to continue as a going concern." Another major issue raised in the warning--a loan from Bank of America that also matured in June--has since been nimbly overcome. "It was tense," says a source close to the negotiations. "Everyone wanted it to come together, but there were moments when we questioned whether it would."

Analysts say the deal is just what Samsonite needs. "It will save them north of $8 million a year," says George Chalhoub, a managing director at Deutsche Bank.

Even with reduced debt, Samsonite faces a luggage market that remains out of fashion with consumers. Many doubt that the travel industry's golden era will return anytime soon. "None of us have a crystal ball, but I don't see any signs of an upturn," says Mary Ross Gilbert, a managing director at Imperial Capital.

At least Samsonite is now better equipped to court consumers. The company plans to put its cash toward global expansion, marketing, and innovative new features for its bags. It has even reintroduced the gorilla in its ads. "We found that when we run the gorilla ads for American Tourister, sales also go up for the Samsonite brand," Sandler says. "I think we'll be seeing more of the gorilla in the future."

This time, maybe it won't be on Samsonite's back. --KEVIN KELLEHER

SAMSONITE'S DECADE OF LIVING DANGEROUSLY

As the company's debt load has swelled back to mid-'90s levels,

its stock price has dived below $1.

1993: Leon Black and Carl Icahn buy the company, which takes over

American Tourister (and Oofi).

1996: Richard Nicolosi slashes jobs and unites brands in a single

sales channel. Icahn sells out.

1997: Samsonite's retail customers rebel when it raises wholesale

prices, squeezing their margins.

1998: Luc Van Nevel comes in as CEO. The company issues junk

bonds to buy out major investors.

2001: As Samsonite struggles to reduce costs, 9/11 sends the

entire travel sector reeling.

2002: With the due dates for big debt obligations looming, the

company seeks to recapitalize.

2003: At the 11th hour, tentative new financing is found. But the

SEC has not yet approved the plan.