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Keach Hagey writes at www.wsj.com – At one of Playboy’s first big bashes after going private in 2011, much seemed as usual for a brand that has embodied American hedonism for nearly 60 years. Bunnies and Playmates sashayed beneath black crystal chandeliers in The Palms Casino’s Playboy Club in Las Vegas, while men in suits hit the dance floor.
One of them was Scott Flanders, 55 years old, Playboy Enterprises Inc.’s first CEO outside the family of founder Hugh Hefner. But the appearance of the uninterrupted good life was largely an illusion.
Mr. Flanders was in the early stages of radically reshaping the company, shrinking its staff by 75%, moving its headquarters from its historic home in Chicago to Los Angeles, outsourcing much of its business, and ushering in what many current and former employees describe as a harsher company culture.
Mr. Flanders has been building on Playboy’s recent strategy of morphing into a licensing company—in the process shedding the seedier aspects of its image. It remains a work in progress.
“Our favorite line is, ‘Less sweatsuit, more Tom Ford,'” says chief marketing officer Kristin Patrick.
Today, Playboy is both smaller and more profitable. It now has annual revenue of $135 million, down from $240 million in 2009, the year Mr. Flanders came aboard. Adjusted earnings before interest, taxes, depreciation and amortization improved to $38.9 million for the year ended September, up from $19.3 million in 2009, the company said, but it fell short of a 2012 profitability target set by its lenders in loan covenants.
Playboy sold its Spice channels and other TV and digital properties to Internet porn giant Manwin, and struck partnerships with art and fashion leaders like Dolce & Gabbana to try to reposition its brand as more aspirational. This winter, the company, long barred from Apple’s digital storefronts because of its pornographic associations, will package a nudity-free version of its content together for the launch of its first iPhone app, featuring lifestyle tips, articles from the magazine and, of course, photos of beautiful women.
Licensing revenue increased to $62 million in the year ended last September, from $37 million in 2009, according to people familiar with the matter. But the revenue stream is often uneven. Already Manwin has tried to renegotiate the $14 million it promised to pay Playboy annually because the digital and TV content isn’t generating enough revenue, according to people familiar with the matter.
A Manwin spokeswoman declined to comment. Playboy said that, while such discussions were initiated, it refused to accommodate a reduction of its minimum guarantees.
Playboy also found itself in violation of its loan covenants in part because the Palms Casino’s Playboy Club closed down, depriving Playboy of $4 million in annual licensing payments, according to people familiar with the matter.
If Playboy misses its covenant again, Rizvi Traverse, the private-equity firm that led the buyout with Mr. Hefner, will have to kick in another $10 million, Playboy said.
After negotiations with lenders, Playboy needs to show that it is on track to generate $47 million this year in Ebitda. But Standard & Poor’s believes the new target will be hard to meet, warning recently it may downgrade the company’s credit rating, saying Playboy “has performed below our expectations.”
The company has cut costs by $33 million over the past two years, in part by outsourcing and shedding much of its media business while still allowing Mr. Hefner to keep his contractually protected role as editor in chief of the magazine.
Mr. Flanders has shrunk Playboy’s staff from 585 when he arrived to 165 today, 65 of whom work in the famous Playboy Mansion where Mr. Hefner lives, as stipulated in the contract taking the company private.
Once the most widely circulated men’s magazine in the country, the namesake publication—which was losing about $12 million a year when Mr. Flanders took over—is printing fewer issues and copies to reduce expenses. Today, it loses about $6 million a year, Mr. Flanders says, although that red ink is offset by licensing fees from its 30 international editions.
Some current and former employees grumble that the restructuring pain extends beyond the cost cuts, and that Mr. Flanders has created a difficult work environment, requiring employees to file regular reports to him detailing their conflicts with other employees in the company, and sometimes doling out verbal abuse.
At the 2011 party, Mr. Flanders allegedly didn’t observe the expected boundaries between a CEO and female employees, according to some current and former employees, who said he was hitting on Playmates and other young women. (Despite its freewheeling reputation, the company had what many former employees describe as a “zero tolerance policy” barring unwanted advances.)
Afterward, a female employee filed a complaint with the company’s human-resources department about alleged comments made by Mr. Flanders. Playboy’s board investigated, and Mr. Flanders underwent sensitivity training, according to people familiar with the matter.
Mr. Flanders confirmed that he underwent the sensitivity training but labeled “absurd” the allegation that he was hitting on Playmates. He said the regular reports were designed to get office conflicts “out in the open quickly” and solve them.
As for the allegations of verbal abuse, Mr. Flanders said he came into a company that “required radical change financially, but also culturally,” and that he had to tell employees “in very direct language” that “they were part of the problem.”
“I don’t believe that I ever crossed the line into abuse, but that doesn’t mean that it wasn’t felt as abusive toward the recipient,” he said. “Because it’s my view that they were hearing this message for the first time.”
Some current and former employees say Mr. Flanders predecessor—Mr. Hefner’s daughter, Christie, who served 20 years as CEO—ran the company with a culture of respect that stands in sharp contrast to the current company culture. But Mr. Flanders says Ms. Hefner rewarded length of service over performance.
Ms. Hefner resigned in 2009, shortly after the stock hit a low of just about $1 a share.
Jimmy Jellinek, the editorial director of Playboy, said Mr. Flanders could sometimes be a “terrible SOB,” but he’s never seen him cross the line into unprofessional behavior, attributing the shift in company culture to the fact that the company went from being public to being backed by the “Wild West” world of private equity.
Before joining Playboy, Mr. Flanders served as CEO of Freedom Communications, a newspaper chain partly owned by private equity that filed for Chapter 11 bankruptcy a few months after he left in 2009. Before that, he served as CEO of Columbia House, where he also led a leveraged buyout of the company by the private-equity firm the Blackstone Group BX -1.73% .
Acknowledging that Rizvi will be looking for a return on its investment before long, Mr. Flanders said Playboy would be “well positioned to pursue a public offering at the end of 2014.”
Rizvi Traverse executives declined interview requests, but the firm said it is “pleased with our investment in Playboy Enterprises,” adding that “Scott Flanders and his team have made great strides in restructuring the company.”
Meanwhile, as the company prepares for its 60th birthday later this year, it has brought in a sexual anthropologist to help it make the content appeal to a generation that grew up with free pornography on the Web.
It got a print redesign in 2012 with more modern photography and an emphasis on natural beauty. Holding up a mock-up of the magazine’s March issue, Mr. Jellinek bragged, “There is not a single fake breast in this issue.”