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Collective Brands Finds Its Footing

New footwear giant aims to consolidate casual shoe industry dominated at the same time by big players like Nike and mom-and-pop chains.

NEW YORK (AP) — It's time for the casual shoe industry to grow up, and Matt Rubel is prodding it on its way.
 
As president and chief executive of Collective Brands Inc., a footwear giant formed last week with Payless ShoeSource Inc.'s $800 million acquisition of Stride Rite Corp., Rubel will head a company that some say points to the future of how casual shoes will be distributed worldwide. Big, sophisticated players like Nike Inc. already have consolidated the athletic sneaker business. But the other side of footwear is still dominated by smallish manufacturers that serve thousands of mom-and-pop chains.
 
It's not just that Collective Brands will be bigger and more efficient than its rivals and become an 800-pound gorilla in the lucrative kids-shoe business. The merged company also aims to become a brand-building powerhouse, injecting a heavy dose of marketing savvy into a stubbornly fragmented and sleepy industry. The result, proponents of the deal say, will be a higher profile at department stores, sporting-goods outlets and other major chains for a fast-growing stable of brands that already includes Stride Rite, Keds, Sperry Top-Sider and Saucony.
 
''I personally believe the footprint of Collective Brands will be significantly larger at some later date,'' said Gilbert Harrison, chairman of Financo Inc., a New York investment bank that advised Payless on the deal. ''Matt Rubel's vision is to democratize fashion and design in footwear and accessories to the world.''
 
After spearheading a multiyear turnaround of Nike's Cole Haan brand, Rubel took the helm two years ago of what had long been a no-frills discounter. Since then, designers hired from shops like Kenneth Cole and Michael Kors have been filling Payless's chain of 4,900 shoe outlets with stylish branded and exclusive lines such as Airwalk, American Eagle, Champion and Dexter, which now comprise about a third of sales and eventually could double that.
 
In its purchase of Stride Rite, which operates more than 300 stores of its own, some have fretted over the price, which was high by some measures, especially after the stock market's recent selloff. Still, most agree it will pay off in the long term. A key advantage of the deal, Harrison said, is that increasing cash flow from the Payless chain can fund long-term brand development and further acquisitions at Stride Rite's higher-margin wholesale business.
 
Indeed, those funds recently have been lacking at Stride Rite. Rubel points out, for example, that the Sperry Top-Sider brand doesn't have a designer for its women's line. Noting that women account for 70 percent of all shoe buying but only 30 percent of Sperry's business, he said that will soon change. Sperry will spend the next few months crafting plans for its untapped pool of female shoppers over the next two to three years.
 
There's also big potential to take the Sperry brand slightly more upmarket and extend it into clothing and accessories, Rubel said. The same goes for Stride Rite's Saucony brand, which has begun a search for a new ad agency. The Keds line, having swung wildly in recent years between targeting customers from ages 16 to 50, now will aim its shoes at 24-year-olds — an age to which both teenagers and the middle-aged alike can aspire, he said.
 
''It's not just about chasing fashion, it's about creating brand platforms'' that can spur demand for an image or lifestyle, Rubel said.
 
That bold vision, which resembles the higher-margin businesses of sneaker giants like Nike, could help Topeka, Kan.-based Collective Brands gain back some of the profits that casual shoe makers have lost over the years to big discounters and middle-market department stores. The latter have gained leverage in recent years by tracking fashion trends themselves and establishing their own relationships with overseas manufacturers to make private-label shoes, said John Shanley, an analyst at Susquehanna Financial Group.
 
''This is going back to the way the shoe industry used to be run 20 years ago — powerful brands that control their own distribution,'' Shanley said.
 
Collective Brands will rely on Payless to fuel the effort, and the chain's ability to generate cash has room to grow, said Jeff Stein, an analyst at KeyBanc Capital Markets. Payless, on average, charges less than $14 for a pair of shoes. But the average at department stores and rival specialty stores like Shoe Carnival Inc. and Brown Shoe Co.'s Famous Footwear chain is more than $30 a pair, Stein estimates. Every time a pair of shoes at Payless goes up a dollar on average as the company adds more high-quality and fashionable footwear, Stein estimates it will add $180 million in sales, and 40 cents a share in yearly earnings.
 
Last year, the Payless chain nearly doubled its earnings to $122 million, or $1.82 a share, on revenue of $2.8 billion.
 
Analysts also have admired Payless' prowess in cutting profitable deals with overseas manufacturers and in distributing shoes to retail outlets quickly and precisely. Having opened a new distribution warehouse in Redlands, Calif., this summer, Collective Brands will open another in Ohio next year. In addition to stocking Payless stores, the new facilities could help the company deliver quick-changing styles and keep sizes in stock for its wholesale customers. That's a task whose complexity has led the more upscale department stores and family-footwear chains to shy away from making and distributing their own shoes.
 
Indeed, Collective Brands aims to become a model of ''precision retailing,'' Rubel said. He takes inspiration from VF Corp., which makes Lee and Wrangler jeans, Vans skater shoes, and The North Face skiwear, among other lines. A smaller, but fast-growing and highly profitable pillar of the new company's business will be in licensing, with which the company aims to stoke growth for its brands worldwide.
 
''It took VF a decade to get where they are today,'' Rubel said. ''If we can do it in five years, it will be pretty amazing.''