Dumping Dunlap

SELL, SELL, SELL! … OK, that’s overstating the case, although the last six trading days have suggested that U.S. investors are starting to ponder whether the S&P 500 deserves to trade at a price-to-earnings ratio of 25 when U.S. corporations enjoyed exactly zero profit growth in the last quarter. The most interesting news of the day was Sunbeam’s unceremonious firing of Chainsaw Al Dunlap, whose much-vaunted turnaround skills failed him badly in his attempt to remake the consumer-products company.

I did a full column about Dunlap five or six weeks ago, when Sunbeam announced that its earnings would fall far short of the Street’s estimates. The only thing that’s changed since that column is that Sunbeam’s numbers have got worse and worse. A recent article in Barron’s suggested that Dunlap had used accounting gimmicks to boost the company’s earnings in his first year there, while Sunbeam’s stock now trades only slightly above where it was when Dunlap took over in the summer of 1996. And Dunlap himself admitted in the past that Sunbeam stuffed inventory channels–without, he says, his knowledge–by offering sharp discounts to retailers last winter, thereby eating into sales for this spring and summer.

What seems particularly curious about all this is that Dunlap signed a lucrative three year contract in February, just before all the bad news hit, and that he bought three companies–Coleman, First Alert, and Signature Brands (which makes Mr. Coffee)–in March with Sunbeam stock that in retrospect looks remarkably inflated. It now seems clear that Dunlap, who had vowed either to make a meaningful acquisition or to sell Sunbeam to a larger company, seriously overpaid for Coleman in particular, but used debased currency by making the purchases almost entirely in Sunbeam stock. The inevitable speculation has been that Dunlap deliberately pumped up Sunbeam’s stock price by stuffing the inventory channels in order to facilitate the acquisitions. The only problem with this scenario is that it’s not clear how he thought he could get away with it. If Kmart buys 50,000 grills in December because Sunbeam’s offering them at cut-rate prices, it’s not going to buy those grills in February, and eventually that’s going to make a difference to the bottom line.

But Dunlap continued to insist that everything was just fine, even in the face of a pile of evidence that things had already fallen apart. And it started to seem increasingly plausible that he thought he could get away with it because he had started to believe his own mythology. In the last few weeks, in fact, Dunlap started to look a little bit like the besieged Nixon. At a presentation for potential bondbuyers, he ranted about his accomplishments at the companies he had ruled before Sunbeam, while at an analyst meeting in mid-May he insisted “the new Sunbeam is efficient and dynamic,” even while announcing, in inimitable Dunlap fashion, that 5100 workers would be laid off. Strangest of all, he embarked on a personal crusade against Andrew Shore, the Paine Webber analyst who was the first to downgrade Sunbeam back in April. At meetings, Dunlap told Shore to sit down and let someone else ask a question, and according to an account in Fortune called the analyst a son of a bitch. Enemies list, anyone?

In the end, the whole denouement could not have been scripted better. The Sunbeam board voted unanimously for Dunlap’s dismissal, and one of the Sunbeam directors who led the Dump Al movement was Charles Elson, a Stetson law professor who has been in the vanguard of the shareholder-rights’ movement. Dunlap has always presented himself as one of the only CEOs who cared about shareholders. And so he was happily hoist by his own petard.