New Markets and Acquisitions Play Central Role in Industry Growth Plans Over Next Five Years…

At a series of investor conferences last week, most notably the Bank of America Consumer Conference, but also at the B. Riley & company 8th Annual Las Vegas Investor Conference and at Citigroup’s Small & Mid-Cap Conference, public companies gave the investment community a review of the year past and a look at plans for the year ahead. Foot Locker discussed its entry into the family footwear market, while Under Armour discussed its plans to expand into more footwear categories. Heelys and Deckers both saw international shores as the place for future growth; and, VF Corp. found itself discounting future acquisitions, focusing more on the companies its recently picked up.

Included in this story are reviews of presentations by:
Foot Locker
Under Armour
Heelys
Deckers
VF Corp.
K-Swiss
Wolvering WorldWide
Fortune Brands
Famous Footwear
Genesco

Foot Locker, Inc., with nearly 4,000 doors in 20 countries, saw 2006 sales per square foot increase to $365, while ending the year with the amount of debt on the balance sheet down by $92 million and a fully funded pension plan. While management admitted that the company “did not post a banner year in 2006,” the presentation drew attention to the last half-decade and the growth seen therein. Specifically, total athletic sales increased from $4.4 billion to $5.8 billion, representing a 5.6% compounded annual growth rate. Over that same time frame, earnings per share increased from 77 cents in 2001 to $1.58 in 2006.

The big news in the presentation, though, was details on the April launch of Footquarters, Foot Locker’s new “specialty family footwear chain that offers both athletic and brand shoes targeted at the value customer.” FL plans to open 30 Footquarters stores in the next month with 70 opened by 2007 fiscal year-end. The stores will average 4,000 to 6,000 square feet with 90% of that space dedicated to selling. Each store will be separated by gender with further breakdown between brand shoes and athletic footwear, with a total of approximately 11,000 to 12,000 pairs in each store.

The stores will be located in strip centers, open lifestyle malls, and other value locations with a self-selection, open stock format. The merchandise will be 50% to 60% brand shoes and 40% to 50% athletic, with half of the product in women’s, 25% in men’s, 20% in kid’s, and 5% in accessories.

Matt Serra, president and CEO, said “Footquarters is not an outlet or a clearance strategy for Foot Locker,” but rather, 98% of the merchandise in the store will have been purchased specifically for Footquarters. “From time to time, if we have an over-run in Foot Locker, we may transfer some merchandise into them, but its not our strategy,” summarized Serra.

Mr. Serra said he expects the chain to “break even or have a slight profit this year.” Further out, the company plans to open 200 Footquarters stores in 2008 and believes that the chain can support 600 to 1,000 stores.

When asked about possible acquisitions and the company’s strategy, Serra said there was the potential for a mall-based acquisition, but that there is more available outside the mall. Foot Locker is “interested in potentially a women’s brand shoe company with 200, 300, 400 stores where [FL has] great depth of knowledge in that category,” said Serra.

Outside the mall, he sees FL looking to acquire someone more in the family footwear sector. “There is a huge opportunity in this family footwear sector and if [they] did buy something, it is possible [they] would combine Footquarters with it for efficiency sake,” said Serra. Though the company will show restraint in its acquisitions, “not consciously [buying] something dilutive,” they are “hopeful” that something will happen in the next six months. As Serra sees it, “a major acquisition or two [will be] more accretive than a share repurchase.”

After all the excitement of the new concept and possible acquisitions, Serra hinted at a program with Nike that should be announced in the next 30 to 60 days that he expects will “really separate [Foot Locker] from a lot of the mall competition.” Though he did not give any specific details, Serra said the initiative will give FL “a lot of exclusive product.”

Discussing the Foot Locker Europe business, Serra said the “first six weeks of the new fiscal year in Europe are very encouraging and if Europe comes back and continues on its current trend, it could add significantly to [the] forecast.” If the business can get back to 75% of where it was, Serra said, the company could pick up 1% to 2% on the comp line and 3% to 4% on the top line.

Serra finished his discussion talking about the more established spin-offs, Lady Foot Locker and Kids Foot Locker. He said Lady Foot was running at a mid-single-digits operating margin with Kids operating at “very solid double-digit” operating margins. Serra said that the best move with these two chains was reducing store count to prevent cannibalization of nearby Foot Lockers.

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Under Armour saw apparel sales grow 43% in 2006, accelerating from a 35% growth rate in 2005. The company reiterated its long-term growth target of 25% as well as confirming current forecasts for 2007 net revenue growth of 30% to 35%, falling in the range of $560 million to $580 million. Income from operations is also expected to grow 30% to 35%.

Discussing its footwear operations, Founder, Chairman and CEO Kevin Plank said that he believes the “footwear business can be as large as [the] apparel business.…” For 2007, the company will not be entering any new categories, but Plank said, “we fully expect to enter non-cleated footwear in 2008.” That appears to support information SEW has obtained that much of the footwear product team at Fila that drove that brand’s focus on running has moved across town to Under Armour. Of the footwear categories Under Armour currently addresses, Plank said the company has a “20%+ market share” in football cleats as well as a nearly 40% share in football cleats sold for more than $40. Of baseball cleats, Plank said “the latest SportScan information that just came over…is that [UA’s] current market share was 18%…”

The company’s outerwear line was in 165 retail doors in 2005 and is expected to expand out to 600 doors for the fall of 2007.

UA’s Plank also discussed the company’s international aspirations, citing that Canada and Japan are both doing well, but that the real focus is Western Europe, especially France, Germany and the U.K.

UA finished the year with 11 outlet stores open and plans to open “about five or six” this year. The combined direct-to-consumer businesses account for about 10% of overall revenues.

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Heelys, Inc., which began operations in 2000, has shipped over 10 million pairs since then, with 6.2 million shipping in 2006. Michael Staffaroni, CEO, president and director, said 85% of the company’s sales come from the 6 to 14 age range, with a 60:40 split between boys and girls. He said that as the company rolls out to more regions, the split is expected to move towards 50:50 as “it is in some of the more mature markets.”

Staffaroni said the customer has been “mostly white suburban until recently. [The company] has seen the Hispanic market [deliver] very strong sales, particularly in California and Florida.” Staffaroni also said that the urban markets have seen “fantastic sell-throughs in the second half of 2005.”

International accounted for “just under 15%” of sales in 2006. Europe was the company’s strongest market with Canada also “very good.” Staffaroni said that “Europe could be as big or bigger than the United States at some point.”

Heelys currently has 80 patents regarding wheeled footwear with the main patent valid until 2020. In shipping to retailers, 81% of the company’s orders are shipped directly from the factory to the stores, while the remainder comes from Heelys’ distribution center in Texas. Management expects for annual net sales and income growth in the 20% to 25% range over the next several years.

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Deckers, Inc. views international expansion, particularly in Europe, as the company’s top growth opportunity. Currently, Deckers’ international sales are only about 12% of the total and come primarily from Teva. By expanding Ugg’s distribution in Germany and the U.K., management feels they can considerably increase the size of the brand.

“About a year-and-a-half ago, we retained new distributors in the U.K.,” said Deckers CFO Zohar Ziv. “When we look at the U.K., in 2005, 22% of the [international] business was in the U.K.; last year, it jumped to 44%.” Management expects international revenues to account for 30% of their business.

In addition to expanding the Ugg brand internationally, Decker’s will be repositioning the Teva and the Simple brands. In Q4 of 2006, Teva sales grew about 16% over 2005. This is following several quarters of declining sales. Order books for 2007 are 15% up from 2006, and DECK expects Teva to grow in the mid-teens in 2007. They also expect the brand to reach $135 million in revenues by 2010 to 2012.

At its peak, Simple was close to $40 million in revenues. In 2005, the brand did about $8 million. Since launching the Green Toe initiative, Simple has started to grow again with 2006 sales up 58% for the year. The brand is already well on its way to being repositioned and management expects 30% growth in 2007 and to hit $35 million by 2010 to 2012.

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While VF Corp. has been very active on the acquisition front, the company said that it will be looking to organic growth as the primary driver going forward.

VF Corp. has already completed two acquisitions in 2007 – Eagle Creek and Majestic Athletic. Revenues from these two transactions should add up to roughly $180 million in 2007. VFC has achieved top line growth of 12% over the past few years with earnings growing 15%. Going forward, they are looking for 8% sales growth, more heavily weighted towards organic, but with acquisitions playing a role.

One of the primary drivers of revenues for VF will be owned-retail. At the end of 2006 VFC had 538 owned-retail locations. Management sees the opportunity to add about 75 to 100 new stores per year over the coming years. Those new doors would mean that retail would grow from about 13% of total sales in 2006 to 18% or more in a few years. In 2007, VFC expects retail to contribute roughly $1 billion to the top line. The primary brands behind the expansion would include the Vans, The North Face, Kipling, Napapijri, and John Varvatos brands domestically and the Lee and Wrangler brands in Europe. VFC has also been able to keep retail operating margins “very close” to in-line with their wholesale business. The company emphasized they are in retail as a brand building exercise, not “for the sake of being a retailer.” The primary difference being VFC is not buying merchandise from other wholesalers; they are simply relying on their own brands.

International expansion will also play a role. International revenues represented less than 20% of sales in early 2000 and grew to 26% last year. Management feels that by 2009 international sales will represent about 30% of total sales.

VFC is also committed to growing gross margin as well as operating margins by creating efficiencies in the company’s Heritage businesses and Lifestyle brands.

Looking at The North Face, management maintains that they have not expanded distribution of the brand apart from a few more doors at existing department store accounts. According to VFC, all of TNF’s growth is attributable to broader selections and better sales at existing wholesale accounts.

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At K-Swiss, CFO George Powlick detailed some turnaround plans in the U.S. for the K-Swiss brand. A major component of that includes returning to its tennis roots and positioning K-Swiss as a “sports premium” brand. Powlick said that part of that push involved the hiring of Russian tennis player, Anna Kournikova, as an endorser to capitalize more on its tennis heritage. Besides signing Kournikova, K-Swiss also plans to sponsor America’s Cup again in tennis. Part of the premium approach includes focusing on the triathlon market.

Powlick said the turnaround is also being handled by a near complete overhaul of its management, noting that only himself, Steven Nichols and David Nichols remain from K-Swiss’s former management. The major hires have included a president of worldwide apparel from Puma; a VP of product from Nike and Adidas; a VP of international sales from Nike and Callaway; and VP of marketing from Keds and Jones New York.

He cautioned that due to design and production lags, product from the new design team wouldn’t fully arrive until the second half of 2008. Powlick noted that domestic futures were running down 45%, although international was up 22%.

Asked why K-Swiss’ backlog numbers have plunged in the U.S., Powlick said, “The reasons are the brand has become less cool. I don’t want to say it’s ‘uncool,’ but in many places it’s less cool than it was and that’s from a marketing standpoint.”

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Wolverine World Wide took this season’s conference road tour as an opportunity to update investors on the components that will fuel sales growth over the coming year. WWW’s current outlook is for sales of $1.2 billion to $1.23 billion.

The company’s first priority is organic growth from the core businesses. Over the next 4 or 5 years, WWW is expecting the N.A. business to grow in the 4% to 7% range. In Europe, WWW is less developed and it's about 20% larger than the U.S. market. Wolverine management sees more opportunity there. Internationally and other markets where the company operates through licensing and distribution arrangements will also see “good growth.” So by 2010, organic sales growth is expected to add about $320 million.

The second priority is WWW’s new growth initiatives like the Patagonia footwear program and the Merrell Apparel program. Management sees these two businesses adding about $100 million in new revenue to the company over the same timeframe. Last year, the company invested $6.8 million in these two projects with no revenue coming in. Now they are looking for the returns.

The last initiative is retail presentation through shop-in-shops and owned retail. Wolverine’s current retail portfolio consists of a “value” chain of 66 stores under the Rockford Footwear Depot name and 16 Track 'N Trail stores that are principally mall-based, full service, full-priced. Merrell represents about 40% of the sales in the Track ’N Trail stores.

Merrell is also opening stores that independent retailers open as Merrell branded stores. All of these channels account for $60 million to $70 million in sales today. Management said that both top line and bottom line results have been growing consistently and they are ready to move out of “test mode.” This is particularly true with the Track’N Trail stores, because the company feels under penetrated in the mall.

On the profitability side of the business, Wolverine sees expanding operating margins to 11.5% by 2008. Longer term, the company believes it can hit the 12.5% range.

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Fortune Brands SVP and CFO Craig Omvedt presented for the company, briefly touching on the Acushnet golf division. Specifically, Omvedt said that golf represents “approximately 10% to 11%” of the company’s overall revenues. He also said that the business is particularly strong overseas, with international sales representing 75% of 2006 growth. For Acushnet, Omvedt said, “our focus is organic growth and a mindset that we’ll eat them rather than buy them.” He said that the company has seen its share of balls sold increase 8% since Nike and Callaway “first came online,” though that number likely has more to do with the tumble of TopFlite than the entrance of Nike and Callaway.

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At Brown Shoe Co., the parent of Famous Footwear, executives said they welcomed the arrival of new competitor, Footquarters, to the family footwear channel. As reported, Foot Locker has announced plans to open 70 new family footwear stores under the Footquarters name and develop plans to open up to an additional 200 stores in 2008. Ronald Fromm, chairman and CEO of Brown Shoe Co. said the increased marketing spent by many family footwear chains and similarly-positioned department stores in the space as they’ve grown have clearly helped support the overall channel.

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Genesco is dealing with general softness in the urban market due to a “lack of fashion direction.” Underground Station was hurt by a strategic shift last year by Nike to stop distributing product to their stores. The chain’s last shipment of Nike product was the 2006 back-to-school season. The chain is being repositioned closer to its original concept of focusing on casual and dress casual.

Hat World is working on some re-assortments at its 113 stores located in core urban locations. The test of three Lids Kids stores in Indiana delivered a “very strong” performance, but the results might have been skewed by the Colts Super Bowl win. Journey’s, which will add between 128 to 138 locations, is coming off a strong year with a 6% comp gain on an operating margin of 12%, partly driven by continued strength in athletics. Journey’s, athletics was described as “not performance; it is fashion and skateboard.” The growth has been driven by skate, which was 20% of the mix previously, but is now at 50%.
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About The Author

Teresa Hartford

Teresa Hartford Editorial & Creative Director | SGB Media teresa@sgbonline.com | 704.651.5741

New Markets and Acquisitions Play Central Role in Industry Growth Plans Over Next Five Years…

At a series of investor conferences last week, most notably the Bank of America Consumer Conference, but also at the B. Riley & company 8th Annual Las Vegas Investor Conference and at Citigroup’s Small & Mid-Cap Conference, public companies gave the investment community a review of the year past and a look at plans for the year ahead. Foot Locker discussed its entry into the family footwear market, while Under Armour discussed its plans to expand into more footwear categories. Heelys and Deckers both saw international shores as the place for future growth; and, VF Corp. found itself discounting future acquisitions, focusing more on the companies its recently picked up.

Included in this story are reviews of presentations by:
Under Armour
Heelys
Deckers
VF Corp.
Wolvering WorldWide

Under Armour saw apparel sales grow 43% in 2006, accelerating from a 35% growth rate in 2005. The company reiterated its long-term growth target of 25% as well as confirming current forecasts for 2007 net revenue growth of 30% to 35%, falling in the range of $560 million to $580 million. Income from operations is also expected to grow 30% to 35%.

Discussing its footwear operations, Founder, Chairman and CEO Kevin Plank said that he believes the “footwear business can be as large as [the] apparel business.…” For 2007, the company will not be entering any new categories, but Plank said, “we fully expect to enter non-cleated footwear in 2008.” That appears to support information SEW has obtained that much of the footwear product team at Fila that drove that brand’s focus on running has moved across town to Under Armour. Of the footwear categories Under Armour currently addresses, Plank said the company has a “20%+ market share” in football cleats as well as a nearly 40% share in football cleats sold for more than $40. Of baseball cleats, Plank said “the latest SportScan information that just came over…is that [UA’s] current market share was 18%…”

The company’s outerwear line was in 165 retail doors in 2005 and is expected to expand out to 600 doors for the fall of 2007.

UA’s Plank also discussed the company’s international aspirations, citing that Canada and Japan are both doing well, but that the real focus is Western Europe, especially France, Germany and the U.K.

UA finished the year with 11 outlet stores open and plans to open “about five or six” this year. The combined direct-to-consumer businesses account for about 10% of overall revenues.

Back to top…

Heelys, Inc., which began operations in 2000, has shipped over 10 million pairs since then, with 6.2 million shipping in 2006. Michael Staffaroni, CEO, president and director, said 85% of the company’s sales come from the 6 to 14 age range, with a 60:40 split between boys and girls. He said that as the company rolls out to more regions, the split is expected to move towards 50:50 as “it is in some of the more mature markets.”

Staffaroni said the customer has been “mostly white suburban until recently. [The company] has seen the Hispanic market [deliver] very strong sales, particularly in California and Florida.” Staffaroni also said that the urban markets have seen “fantastic sell-throughs in the second half of 2005.”

International accounted for “just under 15%” of sales in 2006. Europe was the company’s strongest market with Canada also “very good.” Staffaroni said that “Europe could be as big or bigger than the United States at some point.”

Heelys currently has 80 patents regarding wheeled footwear with the main patent valid until 2020. In shipping to retailers, 81% of the company’s orders are shipped directly from the factory to the stores, while the remainder comes from Heelys’ distribution center in Texas. Management expects for annual net sales and income growth in the 20% to 25% range over the next several years.

Back to top…

Deckers, Inc. views international expansion, particularly in Europe, as the company’s top growth opportunity. Currently, Deckers’ international sales are only about 12% of the total and come primarily from Teva. By expanding Ugg’s distribution in Germany and the U.K., management feels they can considerably increase the size of the brand.

“About a year-and-a-half ago, we retained new distributors in the U.K.,” said Deckers CFO Zohar Ziv. “When we look at the U.K., in 2005, 22% of the [international] business was in the U.K.; last year, it jumped to 44%.” Management expects international revenues to account for 30% of their business.

In addition to expanding the Ugg brand internationally, Decker’s will be repositioning the Teva and the Simple brands. In Q4 of 2006, Teva sales grew about 16% over 2005. This is following several quarters of declining sales. Order books for 2007 are 15% up from 2006, and DECK expects Teva to grow in the mid-teens in 2007. They also expect the brand to reach $135 million in revenues by 2010 to 2012.

At its peak, Simple was close to $40 million in revenues. In 2005, the brand did about $8 million. Since launching the Green Toe initiative, Simple has started to grow again with 2006 sales up 58% for the year. The brand is already well on its way to being repositioned and management expects 30% growth in 2007 and to hit $35 million by 2010 to 2012.

Back to top…

While VF Corp. has been very active on the acquisition front, the company said that it will be looking to organic growth as the primary driver going forward.

VF Corp. has already completed two acquisitions in 2007 – Eagle Creek and Majestic Athletic. Revenues from these two transactions should add up to roughly $180 million in 2007. VFC has achieved top line growth of 12% over the past few years with earnings growing 15%. Going forward, they are looking for 8% sales growth, more heavily weighted towards organic, but with acquisitions playing a role.

One of the primary drivers of revenues for VF will be owned-retail. At the end of 2006 VFC had 538 owned-retail locations. Management sees the opportunity to add about 75 to 100 new stores per year over the coming years. Those new doors would mean that retail would grow from about 13% of total sales in 2006 to 18% or more in a few years. In 2007, VFC expects retail to contribute roughly $1 billion to the top line. The primary brands behind the expansion would include the Vans, The North Face, Kipling, Napapijri, and John Varvatos brands domestically and the Lee and Wrangler brands in Europe. VFC has also been able to keep retail operating margins “very close” to in-line with their wholesale business. The company emphasized they are in retail as a brand building exercise, not “for the sake of being a retailer.” The primary difference being VFC is not buying merchandise from other wholesalers; they are simply relying on their own brands.

International expansion will also play a role. International revenues represented less than 20% of sales in early 2000 and grew to 26% last year. Management feels that by 2009 international sales will represent about 30% of total sales.

VFC is also committed to growing gross margin as well as operating margins by creating efficiencies in the company’s Heritage businesses and Lifestyle brands.

Looking at The North Face, management maintains that they have not expanded distribution of the brand apart from a few more doors at existing department store accounts. According to VFC, all of TNF’s growth is attributable to broader selections and better sales at existing wholesale accounts.

Back to top…

Wolverine World Wide took this season’s conference road tour as an opportunity to update investors on the components that will fuel sales growth over the coming year. WWW’s current outlook is for sales of $1.2 billion to $1.23 billion.

The company’s first priority is organic growth from the core businesses. Over the next 4 or 5 years, WWW is expecting the N.A. business to grow in the 4% to 7% range. In Europe, WWW is less developed and it's about 20% larger than the U.S. market. Wolverine management sees more opportunity there. Internationally and other markets where the company operates through licensing and distribution arrangements will also see “good growth.” So by 2010, organic sales growth is expected to add about $320 million.

The second priority is WWW’s new growth initiatives like the Patagonia footwear program and the Merrell Apparel program. Management sees these two businesses adding about $100 million in new revenue to the company over the same timeframe. Last year, the company invested $6.8 million in these two projects with no revenue coming in. Now they are looking for the returns.

The last initiative is retail presentation through shop-in-shops and owned retail. Wolverine’s current retail portfolio consists of a “value” chain of 66 stores under the Rockford Footwear Depot name and 16 Track 'N Trail stores that are principally mall-based, full service, full-priced. Merrell represents about 40% of the sales in the Track ’N Trail stores.

Merrell is also opening stores that independent retailers open as Merrell branded stores. All of these channels account for $60 million to $70 million in sales today. Management said that both top line and bottom line results have been growing consistently and they are ready to move out of “test mode.” This is particularly true with the Track’N Trail stores, because the company feels under penetrated in the mall.

On the profitability side of the business, Wolverine sees expanding operating margins to 11.5% by 2008. Longer term, the company believes it can hit the 12.5% range.

Back to top…

About The Author

Teresa Hartford

Teresa Hartford Editorial & Creative Director | SGB Media teresa@sgbonline.com | 704.651.5741

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