Broadening its reach into the athletic footwear market, Brown Shoe Company Inc. last week announced that it acquired privately-held athletic shoe-maker American Sporting Goods Corp. The purchase price was $145 million in cash plus the assumption of approximately $6 million in debt.
ASG's brands include Avia, which makes men's and women's athletic shoes; Ryka, a women's shoe brand that has Kelly Ripa of “Live with Regis and Kelly” as its spokeswoman; and AND1, the edgy basketball shoe and apparel brand with roots in Philadelphia. In the most recent fiscal year, ASG had net sales of $232 million, with estimated EBITDA of $29.6 million.
Avia, Ryka and And1 make up more than 80% of ASG sales. ASG bought Avia from Reebok in 1996. It acquired Ryka in 1999 and And1 in 2005. ASG's remaining brands include Nevados, the outdoor sandal and boot line, and Yukon.
“ASG represents a great strategic fit for us, and we are excited about the opportunity to welcome well-known brands and talented people to Brown Shoe,” said Diane Sullivan, Brown Shoe's president and COO, on a conference call with analysts and investors.
Brown Shoe expects the acquisition, which had been rumored for months, to be accretive to 2011 net income by 10 cents to 12 cents per share, excluding the impact of purchase accounting adjustments and transaction and integration costs. BWS anticipates approximately 2 cents per share in due-diligence costs to impact fourth quarter 2010 results, which will be released March 15.
The cash transaction will be funded by Brown Shoe's revolving credit agreement, which has been increased by $150 million to $530 million. Brown noted that the valuation was approximately 0.6 times 2010 preliminary net sales and five times 2010 preliminary EBITDA.
The ASG team will remain in the company’s Aliso Viejo, CA offices and report to Mark Lardie, Brown Shoe division president for wholesale. Lardie has former experience in the athletic space as the former GMM of Footstar's Athletic segment, overseeing Footaction and Just for Feet. Similar to past acquisitions such as Sam Edelman or Bennett Footwear, back-office functions will be integrated into Brown Shoe but front-end functions, such as sales, will operate separately. A general manager will eventually be hired to oversee ASG.
ASG CEO Jerry Turner will remain with Brown Shoe as a consultant for one year to assist with the transition. Turner, who helped found the company in 1984, had said he was ready to retire in 2006 and put the company up for sale. But Turner, now in his mid-70s, had reportedly gone back and forth on whether or not to sell, leading two former chief executives – Kevin Wulff and Tom O'Riordan – to step down in recent years.
For Brown Shoe, the acquisition brings a significantly stronger athletic focus to its wholesale segment while also building on the success it's already having in comfort and fitness, particularly with its Dr. Scholl's and Naturalizer brands. The BWS wholesale segment also includes LifeStride, Etienne Aigner, Franco Sarto, Sam Edelman, Carlos Santana, Fergi, Via Spiga, Vera Wang Lavender Label and Buster Brown. Brown Shoe also operates the Famous Footwear and Naturalizer retail chains as well as shoes.com. The acquisition will lead wholesale segment sales to top $1 billion in 2011.
On the call, Sullivan referred to ASG as “a great partner at Famous Footwear for a long time,” but said Brown Shoe was first of all attracted to ASG because it complements the success the company is already having with health & wellness offerings.
“The brands fit in well with our existing portfolio and strengthen our position in the healthy living space,” said Sullivan. “Healthy living, as we've discussed over the last year or so, is a key strategic focus for Brown Shoe, anchored by our core Naturalizer and Dr. Scholl's brands, as well as strong brand offerings from Famous Footwear. But we recognized that we couldn't really win in this space without an athletic play. ASG rounds out the portfolio nicely in this area. Avia, Ryka and And1 are authentic athletic and lifestyle brands that incorporate unique technologies and design. And all three of these brands have really nice brand recognition and a broad appeal to our existing customer base.”
She also said both companies serve the same value-seeking consumer and provide Brown Shoe with “access to a greater portion of their closet and an opportunity to become a bigger part of their lives.”
Second, she said the acquisition will be “quickly accretive” and all three brands have healthy potential for further growth. For instance, only slightly more than 10% of ASG's sales come from international markets. Brown Shoe also plans to add e-commerce capabilities for ASG's brands.
“We believe ASG's brands are under penetrated and have room to grow, not only at the domestic wholesale level, but with licensing and international opportunities as well,” said Sullivan. “Brown Shoe's infrastructure, balance sheet and resources will help develop and accelerate these growth opportunities.”
Brown Shoe Co. CFO Mark Hood added that ASG has traditionally operated with double-digit operating margins but he expects that operating under Brown Shoe's larger structure will add about 200 basis points to ASG's operating margin over the next several years. Said Hood, “The ASG brands have been consistently profitable, and looking forward we believe we can further elevate that profitability through the creation of sourcing, distribution and other infrastructure synergies.”
Third, Sullivan said ASG's team has “a proven track record of developing athletic footwear for the professional and recreational athlete alike. Their management is also well-versed in a multiple brand strategy, similar to our own, which will add to our ability to target several markets and growth opportunities simultaneously. And there are clear opportunities for collaboration between ASG and our own Brown Shoe brands.”
Fourth, she said ASG has a “solid presence” with many of the top athletic chains in the U.S., providing an opportunity to further diversify Brown Shoe's wholesale segment.
About 25% to 30% of ASG's sales are sold in athletic specialty or sporting goods stores with national chains and family footwear stores being its largest channels.
Sullivan elaborated, “Over time, we believe we have the opportunity to capitalize on the partnerships that ASG has in the athletic specialty and sporting-goods channel, with other brands from our healthy living portfolio as well as leverage our broad wholesale and retail platform, and importantly our consumer insights for the benefit of the ASG brand.”
Asked to elaborate on growth potential for each brand in a Q&A session, Sullivan said she sees Avia as the “cornerstone” of the company. She added, “We think there is a significant opportunity to build on that brand with additional innovative product, more speed and more strength in their go to market strategies than they've had up to this point in time.”
Sullivan views Ryka as an “underdeveloped opportunity” and noted that it's lately been regaining traction at retail. She said, “When we think about the first athletic brand for women, and you think about our position with Naturalizer in the marketplace as the first comfort footwear brand for women, we think there's some interesting opportunities in terms of the way that we take our knowledge of women and women's fashion, and to bring that into their company.”
For instance, she expects Brown Shoe will be able to build on the penetration Ryka has recently found in the department store channel.
Finally, Sullivan described And1 as “a nice business that right now is on an upswing and has quite a lot of interest and growth potential internationally, and we are really encouraged by that.”
She also said that although both Avia and Ryka benefited last year from the toning craze, Brown Shoe doesn’t expect to see any kind of inventory issue to impact ASG's margins. While expecting toning “to represent a much smaller portion of the marketplace in 2011,” she expects to see growth at Avia, Ryka as well as And1. Good demand in the lightweight running category is expected to make up for any declines in toning for Avia.
At the same time, she stressed that ASG's team will also help grow Brown Shoe's existing wholesale brands.
“We know the department store channel extremely well. We know the family footwear channel well,” said Sullivan. “They know athletic specialty and sporting goods. So we think there's lots of opportunity as it relates to that for even Dr. Scholl's and a number of our other brands.”
ASG's brands also account for about 1% of all of Famous Footwear's business and that may grow as the two companies collaborate on programs.
The acquisition includes three factories that ASG owns in China. In the Q&A session, Sullivan said she did have concerns about taking on manufacturing facilities. But due diligence showed that the plants are part of ASG's strategy of offering value to consumers and a key differentiator in competing with bigger athletic companies. Plant ownership also provides other benefits.
“It gives us the protection of proprietary ideas,” adds Sullivan. “It also affords us a very good speed-to-market opportunity, and it really makes us a smarter buyer as it relates to input costs and what's going on in the marketplace. So we are feeling pretty good about the opportunity to continue to use that point of differentiation to further create great products for customers.”
Ron Fromm, Brown Shoe's chairman and CEO, added that the factories were moved from the Shanghai area to regions further north that lend itself to more efficient production. Said Fromm, “I think they are on the new side of this wave, not on the old side of the wave, and I think that's very important.”
Moreover, he noted that only about 35% of ASG's volume comes from their own factories and any exposure for Brown Shoe is further reduced considering the Dr. Scholl's and Naturalizer athletic business. Said Fromm, “We will have a very small percentage of our total athletic business placed in these factories. So we believe we will operate them at a high end of the capacity curve [on] a continuous basis.”
