Cole National Corporation Business Information, Profile, and History

History of Cole National Corporation

Once an optical retailer with nearly 3,000 outlets in the United Stat es, Canada, and the Caribbean, Cole National Corporation was acquired by Italy's Luxottica S.p.A. in 2004. Luxottica proceeded to fold Col e's operations into its North American Retail Group, and while Cole's holdings (such as Pearle Vision) continued to thrive, the Cole struc ture was dissolved. Over the course of its history, Cole National had dabbled in specialty retail ventures ranging from key cutting servic es to children's toys to cookie-baking to shoe repair and watchbands. Optical retail, however, began to play a large role in the company's strategy in 1996 when it acquired Pearle Inc. in a deal that made it the second-largest optical retailer in the United States. In 2004, a t the time of the Luxottica acquisition, the company operated as a le ading provider of vision care products and services--including manage d vision care programs--and personalized gifts through its Things Rem embered stores.

Early History

Company namesake and guiding light Joseph E. Cole was born in Clevela nd in 1915, the youngest of nine children. He started his retail care er with Cleveland's National Key Company in 1935 at the age of 20. He left National Key nine years later to establish the key division of Curtis Industries, another Cleveland business.

Cole's first key shop was set up in the parking lot of a local Sears, Roebuck & Co. store that same year. By the end of the decade, Co le had built his little sideline into America's second-largest key re tailer. The self-made entrepreneur was coronated "king of keys" in 19 50, when he acquired National Key and Curtis' key division, the indus try's two top players. The newly unified firm took the name of its la rger constituent, National Key. (Although National Key was founded in 1932, Cole National claimed 1944 as its inaugural year.)

Joe Cole's key-selling concept was predicated on the idea that keymak ing was a highly specialized, service-oriented business. While mass r etailers wanted a share of this segment's high profit margins, they d id not want to deal with the equally high level of training, service, and inventory control it demanded. Cole leased space from such leadi ng department stores as Sears, Roebuck and Co., Montgomery Ward, and Kresge's. He then installed key-making machines, trained store employ ees to cut keys, and oversaw the operations' complex 3,000-unit inven tory. While Cole neither manufactured keys nor owned stores, Cole fou nd a profitable niche in providing its services to customers and reta ilers.

A company executive would later characterize Cole's counters as "an o asis of service in a sea of self-service." The tiny selling areas eme rged as the most productive areas--in terms of profits per square foo t--in some stores. During the 1950s, the company expanded into the ma nufacture and sale of key chains and jewelry, and launched a while-yo u-wait shoe repair division.

Public Offering Leads to Growth in the 1960s

The explosion of automotive and home sales in the postwar era made ex pansion of the replacement key industry virtually inevitable. Less th an a decade after assuming the helm of National Key, Joe Cole increas ed sales fourfold, from $2.33 million in 1950 to $10.52 milli on in 1959. When the firm went public that year, it sold out its enti re offering in one day. The Cole family retained a 25 percent stake i n their company, which by that time was netting over $635,000 ann ually.

The company used the proceeds of its initial public offering to fund an acquisition spree in 1960. Over the course of that single year, th e firm purchased Fairfield Publishing, a greeting-card company; Shore Manufacturing, a novelty business; and Masco Optical. Having thus di versified from its base in keys--and in recognition of its leader--th e company was renamed Cole National Corp. in 1960.

That same year, Cole tested a new concept in optical retailing, estab lishing an eyewear counter within space leased from a Detroit Montgom ery Ward store. This venture was based on the same concept as the com pany's key business. Company strategists recognized that mass retaile rs had the traffic, but not the expertise, to run such an operation. Masco Optical became the foundation of a chain of optical counters th at numbered over 150 locations by the end of the 1960s. Optical cente rs had become Cole National's largest division by 1964, contributing about half of annual sales.

Although CNC retained a focus on retailing, it also diversified into manufacturing during the 1960s. It acquired Sterling Industries, a Cl eveland manufacturer of aluminum, steel and plastic products in 1961, thereby winning an exclusive contract with Welcome Wagon. In 1966 Co le National merged with Susan Crane, producers of giftwrap, and acqui red the Gene Upton Co., manufacturers of self-adhesive metal letters and numbers. Two years later it acquired Manco, Inc., a manufacturer of Topps and Everbest brand watchbands. The Manco purchase included C anadian, British, and Japanese retail outlets. Griffon Cutlery Corpor ation, a marketer of manicure tools, was added to the roster in 1969. These acquisitions more than quadrupled Cole National's sales to ove r $40 million, but also invited speculation from analysts that th e company had over-extended itself. In 1970, in fact, the retail cong lomerate's profits declined by half.

The company's acquisitive push also got it into trouble with the Fede ral Trade Commission in the mid-1960s. Cole National had purchased In dependent Lock Co., a 45-year-old manufacturer of locks and key blank s with about $14 million in annual sales, early in 1964. In 1967, however, the government compelled Cole to sell the business, which w ould have nearly doubled CNC's annual sales.

Reorganization in the 1970s-80s

Although Joseph Cole brought in new presidents to help him run the co mpany beginning in the 1960s, he retained defacto control of his firm as its chairman and chief executive officer. In the face of declinin g profits in the 1970s, son Jeffrey A. Cole convinced his father to b ring a group of young MBAs like himself into upper management. Accord ing to a 1980 article in Forbes, the "young turks ... managed to rid the company of its poorer diversifications, prevent Joe Cole from mak ing any more bad moves and get the company back to its special servic e orientation." Both the Canadian retail operations and a distributio n business were put on the auction block. In spite of (or perhaps bec ause of) the divestments, annual revenues rose by nearly 50 percent, from $106 million in 1976 to $158 million in 1980. One surviv or of the cutbacks was Things Remembered, the chain of mall-based gif t shops that specialized in monogrammed and engraved items. Establish ed in 1967 by Cole National, the chain had expanded to 280 shops in 3 8 states by 1980.

In 1984 Kohlberg Kravis Roberts and Co., an investment firm, took Col e National Corp. private through a leveraged buyout. The outsiders to ok a managerial approach typical of the investment-house "reorganizat ions" of the 1980s. They sold off Cole's Craft Showcase chain in 1984 and the Original Cookie Company stores in 1985. In 1987 a group led by Jeffrey Cole took on more debt to regain control of the retail con glomerate. They created a holding company, CNC Holding Corporation, a nd kept the firm private until 1994.

During the early 1980s, CNC had made what has been called "its highes t-profile deal" with the 1981 acquisition of Child World Inc., which then ranked second only to Toys-R-Us among toy supermarket chains. By 1985, when the parent sold 18 percent of the Child World subsidiary to the public, the chain boasted over 100 stores in 21 states under t he Child World and Children's Palace names. However, a late 1980s ret ail slump, combined with intense competition from Toys-R-Us and a 6;300 million-plus debt load, crippled the subsidiary chain. While Je ffrey Cole struggled to sell off the business--in 1990 a potential ac quirer failed to secure financing--Child World incurred a massive 6;192 million loss on sales of $830 million.

Cole's woes concerning Child World were compounded when the chain was one of seven toy stores named in a 1990 federal lawsuit brought by t he Consumer Product Safety Commission. Nonetheless, CNC was finally a ble to sell the subsidiary to a coalition of former Toys-R-Us executi ves. Instead of cash, Cole traded $60 million in long-term debt f or $30 million in short-term debt. While Cole had been able to ne gotiate a $157 million price tag for the stores in 1990, it was c learly not in a strong bargaining position by this time. The divestme nt slashed Cole's annual sales from over $1.25 billion in 1990 to $425 million in 1991. Within a year of the exchange, Child World 's new owners were forced to file for bankruptcy and liquidate the en tire chain.

That deal left CNC with three retail divisions: Things Remembered gif t shops; Cole Key; and Cole Vision. Cole's Vision group, along with m uch of the eyewear industry, had enjoyed double-digit annual growth i n the 1980s. By the early 1990s Cole Vision ranked third among the Un ited States' largest eyewear chains, and its more than 750 outlets co ntributed about half of the company's sales. Although annual increase s in eyewear sales fizzled to just 1 percent by that time, CNC expres sed confidence that aging baby boomers would be buying many pairs of glasses and contacts after the dreary economy reheated in the mid-199 0s. In fact, the company expanded its eyecare business into the manag ed healthcare market in the early years of the decade, establishing b enefits contracts with labor unions, insurance companies, health mana gement organizations, and other large groups.

CNC also converted hundreds of its Cole key counters in department st ores into "Gift Centers" that resembled the successful Things Remembe red shops. The growing emphasis on giftware prompted expansion of the concept into a "superstore" format and the addition of personalized soft goods such as shirts on a test basis.

After incurring back-to-back net losses in 1990 and 1991, Cole Nation al's profits multiplied steadily, from $5.5 million in 1992 to 36;24.7 million in 1994. Sales increased as well, from $428.1 mil lion to $528.1 million over the same period. Most of that increas e came from expansion; same-store sales increased by 8.2 percent in 1 993 and 3.5 percent in 1994. An aggressive growth plan fueled the acq uisition or establishment of 235 new retail locations in 1994.

That same year, Cole National returned to the public arena with a 6.5 million share offer, the proceeds of which were used to reduce persi stent leveraged buyout (LBO) debt. The reborn firm's "first" annual r eport enumerated several corporate goals, including debt reduction, i ncreased earnings growth, and (re)doubling sales to over $1 billi on by 2001.

Changes in the Late 1990s and Beyond

In 1996, CNC made a decisive move to strengthen its Cole Vision unit when it acquired Pearle Inc. The deal secured the company's position as the second-largest optical retailer in the United States but prove d to be difficult to integrate. CNC integrated the Pearle Vision reta il centers into its Licensed Brands unit, which was operating Sears O ptical, Target Optical, and BJ's Optical Stores. Pearle Vision and Co le Licensed Brands had vastly different business models and catered t o different types of customers. Pearle Vision generally tapped into a n upscale clientele looking for eyeglasses in one hour, while CNC's o utlets were geared towards moderate income customers, had a centraliz ed lab, and offered private label frames. Costs associated with the a cquisition as well as increased competition began to stall profits.

As such, CNC was forced to rethink its strategy. In order to shore up earnings, it split its business into two divisions in early 2000. Me anwhile, CNC had shuttered 402 gift stores located in Sears departmen t stores in 1998 and purchased the managed vision-care benefits divis ion of Metropolitan Life Insurance Co. in 1999.

During the early years of the new millennium, CNC worked to combat a sluggish economy while advances in corrective laser eye surgery poten tially threatened sales of eyeglasses and contacts. However, the comp any's optical retail and leading managed vision care business made it an attractive target for larger companies looking to expand their op tical holdings. Sure enough, CNC caught the eye of two international firms. Italy-based Luxottica S.p.A. and Moulin International Holdings Ltd. of Hong Kong began their battle for CNC in 2004.

Luxottica first offered $401 million for CNC in 2003. Moulin coun ter offered in April 2004, coming in with a $419 million bid just before shareholders met to approve the Luxottica offer. Moulin lost its footing trying to secure financing for the deal, leaving Luxottic a in a position to seal the deal with a $495 million offer. The F ederal Trade Commission gave its approval in September, enabling CNC and Luxottica to finalize the union in October. CNC headquarters were moved to Mason, Ohio, and the majority of its operations were consol idated under Luxottica's Retail division--the future of Things Rememb ered remained uncertain due to Luxottica's focus on its optical busin esses.

As a member of Luxottica's Retail group, CNC held an enviable positio n in the eyewear industry. Often referred to as the 800-pound gorilla by independent eyewear retailers, Luxottica owned optical retailer L enscrafters Inc. and considerably strengthened its optical empire whe n it acquired CNC. Luxottica had also acquired Sunglass Hut and OPSM Group in 2001 and 2003 respectively and had become the leading distri butor of optical and sun products in North America and Asia Pacific a s a result of its strategic purchases. By adding CNC's Managed Vision Care to its arsenal, Luxottica also secured a position as the second -largest administrator of U.S.-managed vision programs used by corpor ations, government entities, and health insurance providers.

In 2005 the absorption of Cole's holdings into the Retail Group was c omplete and Cole National ceased to exist as a separate entity. Luxot tica's future success depended on the successful integration of these different companies. In fact, CNC's Pearle Vision and Lenscrafters, both consolidated under the arm of Luxottica Retail, were referred to by a Crain's Cleveland Business journalist as the Pepsi and C oke in the eyeglass frames world. With such similarities, Luxottica's future strategy would no doubt include initiatives to differentiate the two retail brands.

Principal Competitors: Eye Care Centers of America Inc.; Natio nal Vision Inc.; U.S. Vision Inc.

Chronology

• Key Dates:
• 1935: Joseph E. Cole starts his retail career with Cleveland's National Key Company.
• 1950: Cole acquires National Key and Curtis' key division; the company adopts the National Key name.
• 1959: National Key goes public.
• 1960: The company changes its name to Cole National Corp.
• 1967: Things Remembered is established.
• 1984: Kohlberg Kravis Roberts and Co. takes the company privat e in a leveraged buyout.
• 1990: Cole sells Child World Inc.
• 1994: The company launches an initial public offering.
• 1996: Pearle Inc. is acquired.
• 2004: Luxottica S.p.A. buys Cole National and folds its operat ions into Luxottica's North American Retail Group.