Russell Corporation laid out its new reporting structure for investors last week as part of an annual presentation to review strategy for the business. During the four hour 2005 Analyst Day event, management reminded investors that RML had moved roughly 99% of its sewing offshore from 1998 to 2001 and had exited about $150 million in unprofitable businesses, while reducing costs by $150 million over that same time-frame. The moves were part of a strategic effort by the company to re-position itself as a brand marketing platform rather than a manufacturing company.
Based on recent performance, it appears that acquiring established brands will provide more upside for RML in the near future than its core brands can provide.
RML has again changed the structure of its reporting, now dividing the company into Sporting Goods, Activewear, and Other. This establishes the umbrella entities that can house any number of brands. Having the Spalding, Moving Comfort, and Brooks Sports businesses reporting into a Russell Athletic division was difficult to understand, especially when the two presidents of the Russell Athletic business reported to the Russell Athletic division CEO.
From a sourcing perspective, the shift in the business model is exemplified by a breakdown in how each division does business. For the Apparel businesses under the Sporting goods umbrella, 40% of product is sourced and 60% is done internally. Under Activewear, only 30% of the Apparel is sourced. In Sporting Goods, 100% of Footwear is sourced and 60% of the Equipment piece is sourced.
Russell Corporation identified Spalding, Russell Athletic, and Jerzees as its three major brands of focus, with Brooks, Moving Comfort, Mossy Oak, AAI, Dudley, and Bike identified as “targeted” brands that are highly relevant, but more narrowly focused.
In laying out key strategies for the business, Russell sees Spalding as its largest international brand, building it into a billion dollar global sporting goods “mega-brand” in equipment, apparel, and footwear. They expect to develop the business “aggressively” on the international side through acquisitions and joint ventures. Management said they will develop a “premium basketball footwear” line for Spalding using the Brooks team.
Spalding president and CEO Scott Creelman said the Spalding business today boasts $400 million in worldwide direct and licensed sales. They stated that 50% of brand sales are in the U.S. and 50% come from international through 80 country specific distributors and 70 licensees with specific category expertise. Spalding is also making moves to clean up its brand image by eliminating licensees that do not align with brand channel strategy. The majority of apparel moves in-house to Russell. Other key strategies for the company involve fully integrating AAI and Huffy Sports into the Spalding platform, with Huffy expected to deliver double-digit operating margins by 2007.
On the international side, look to Asia as a key focus as Spalding starts to benefit from a restructured master licensing deal with ITOCHU in Japan worth roughly $100 million. The company also announced last week a new strategic alliance agreement in China that sees Spalding partner with Kangwei to design, manufacture, and sell Spalding products in China. Kangwei, which was founded in 1986, is a privately held company located in Guangzhou and was one of the first companies specializing in sporting goods products in China, boasting more than 1,000 self-owned or franchised retailing outlets under the Kangwei brand. The Spalding deal, which covers apparel, footwear, and equipment, is expected to result in 600 Spalding stores and shops by the end of 2006, a program that will undoubtedly benefit from the Bejing Olympics and a host country that is expected to go crazy for basketball as a result. Guangzhou Ganwei Sports Goods Co., Ltd. is the new subsidiary set up by Kangwei to manage the business.
For Jerzees, management expects to continue to build the brands position as a low-cost provider of basis activewear. They will also introduce more performance athletic wear product and invest in additional off-shore facilities and aggressively lower costs in all areas of the business to “remain competitive.”
At the Russell Athletic brand, management talked about expanding the performance athletic positioning of the brand, while continuing to grow the college bookstore and team businesses. Management is working to trade consumers up to higher price points, pointing to a 100% increase in the performance range since 2004. They said store tests at Dicks Sporting Goods are performing “well above national averages” and said the spring sell-through is up across the top national accounts they service. The college bookstore business has had “strong double-digit growth.”
One challenge here may be replacing Matt Mirchin, who quietly resigned two weeks ago as president of the Russell Athletic retail business. Mirchin, who had been a corporate officer, saw his duties split after RML brought Mike Thorne in from Spalding to run the team business. Hiring a new CEO in above Mirchin probably didnt help either.
But the bigger issue here is that Mirchin is taking all of his knowledge of the Russell business and setting up shop at Under Armour, where he will reportedly run domestic retail sales. Apparently no non-compete here as Mirchin hit the ground running in Baltimore last week. Ryan Wood will reportedly work on expanding the international business and Bill Kraus will continue to run sports marketing and the team end of things.
On the team side, Thorne loses Phil Johnson, the last of the top team from Bike Athletic, as he joins fellow Bike alum Jim Corbett at Fruit of the Loom (see following story). What Mike does maintain is a brand with a 31% share of all high school athlete uniforms, according to the company. They also quoted a 32% share of baseball uniforms and a 47% share of football uniforms.
At Moving Comfort, the companys efforts to expand the brand as a high-end performance line are paying off as they continue to expand penetration of key national accounts. Management said that MC was now the #1 sports bra at REI, with 53 doors, and is also tops at Title 9, a womens performance catalog house. They pointed to one unnamed key account that doubled the doors with Moving Comfort product this spring.
As for Brooks, RML sees doubling sales and profits over the next four to five years at its newest acquisition, with continued expansion into the sporting goods channel as a key initiative along with expanding share at specialty. They will apparently leverage the footwear knowledge base as well to develop products for other brands under the umbrella.
Brooks was characterized as a $170 million global brand, with 65% of sales coming from direct sales and 35% coming from licensed sales. International makes up 52% of the business, while domestic contributes the 48% balance. Brooks president and CEO Jim Weber said that a channel and performance product focus has given the Brooks brand the highest average price points in the running category in 2005, posting an ASP of $76.36, compared to $65.64 for Asics, $48.87 for New Balance, and $46.46 for Saucony. Weber said they gained two full share points to 17% in the specialty channel in 2004, but still trail Asics who also gained two points to sit atop the leader board with a 22% share.
As for a look ahead, Russell Corporation expects to see annual sales growth of 5% to 7% over the next four years, with compounded annual earnings per share growth of 12% and double-digit operating income as a percent of sales by 2009.
