Collective Brands Sheds Light on Payless Struggles

Speaking at Oppenheimer & Co. Consumer Conference, Michael Massey, Collective’s interim CEO who also heads international growth and overall business development, said that while Collective is seeing strong profitable growth in several other areas, Payless U.S. operations are by far its largest – representing 60 percent of revenues-and has been suffering from declining traffic and profitability for several years. In the first quarter, unfavorable weather, gas and food inflation’s impact on the mass-market customer, and product cost inflation depressed results. But Massey admitted that chain has a problem with customers over its perceived value.

“Our customers have wide variations in perception of our current value proposition,” said Massey. “Some are okay with it. They are buying. We believe our more price-sensitive customer is not.”

The chain had significantly narrowed its product offerings relevant to its most price-sensitive consumers by raising opening price points and increasing proportion of SKUs at higher price points. But while the strategy wound up maximizing margin rate, it came at the expense of margin dollars and wound up turning off its core customers.

“Segments of our customers stopped responding to our brand and didnt respond to our messaging,” said Massey. “We didnt react in time. Our messaging around value decreased significantly, especially to our most price-sensitive consumers. Our mass marketing spend decreased. Our message is focused on brand and lifestyle, not value, and our placement of advertising skewed to higher-end demographics, so, some of our customers left us.”

To reclaim its former budget customer, Payless is selectively reducing initial mark-on targets and sharpening promotional activity. Efforts include bounce-back coupons, additional markdowns, and free shipping online with minimum purchase. Noting that many of its discount competitors are completely self-service, Massey said Payless is using stores associates to increase customer engagement by adding staffing hours, customer conversion contests, and initiating save-a-sale couponing initiative. Marketing is also being increased across text, e-mail and TV with a “really price focused” message given the “significant shift” the chain has to make.

Nonetheless, he added, that Payless is not walking away from statement-like product. Massey said, “I want to emphasize, this does not mean that we will stop selling halo product. It does not mean that we will not offer product at a higher price and higher price points. Instead it means that we will have lower key price points and more selection in units at these entry-level price points accessible to the price-sensitive customer.”

The first wave of actions were implemented during the prior week. Come this fall, Payless is tailoring store assortments and marketing for seven supplemental customer segments matrixed to existing customer clustering, implementing an initial customer loyalty program, and will remodel another 70 stores. Also as part of the CEO’s exit, Collective has expanded its executive committee to include business unit CEOs in order to improve communications and speed up decision making.

“The business unit CEOs will focus on their business operations to drive sales and margin. And I will focus on the general direction, allocation of resources between business units, leverage of infrastructure, and drivers of shareholder value,” said Massey.

Regarding its other businesses, Collective management said Payless International currently accounts for about 17 percent of revenues with an opportunity to grow to 25 percent of sales. Last year, Payless International’s sales were up 9 percent to $460 million while achieving an operating margin of 12 percent, up 4 points over the prior year.  Said Massey, “Quite frankly, we are not satisfied with that level of growth.  We will speed up our growth through our franchise model.”

Besides Latin America, the Middle East, Indonesia, Mexico and the Philippines were cited as untapped growth markets for Payless.
Doug Treff, EVP and chief administrative officer, said that through Collective’s Performance + Lifestyle Group and Collective Licensing, the wholesale business makes up 19 percent of company revenues overall and is expected to expand to over 25 percent of the business over the next four or five years.

Among brands, Sperry Top-Sider grew more than 40 percent in 2010 to $211 million, aided by success in expanding into more casual categories outside boat shoes and doing a better job reaching women and kids.
Sperry has also reduced its door count by 40 percent over the last few years to about 3,500 doors to help elevate the brand with key accounts.
Saucony’s revenues last year grew 29 percent to nearly $250 million by expanding into “run anywhere and trail running footwear” as well as being among the first traditional running brands to capitalize on the minimalism trend with its Hattori and the Kinvara models, said Treff. Athlete and event endorsements as well as overall marketing has increased to raise awareness the running brand.

Keds sales grew more than 20 percent to less than $80 million with a greater focus on the millennial consumer. Treff added that Keds is profitable. A new apparel licensing deal with Li & Fung for Keds will hit stores in 2012. Both Saucony and Sperry are also “growing nicely” in kids.

Massey also noted that its board’s search for a permanent CEO “is in full gear” with the engagement of Spencer Stuart to conduct the search.