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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended January 1, 2005 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to |
Commission file number: 000-50563
Bakers Footwear Group, Inc.
(Exact name of Registrant as Specified in Its Charter)
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Missouri |
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43-0577980 |
(State or Other Jurisdiction of
Incorporation or Organization) |
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(I.R.S. Employer
Identification Number) |
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2815 Scott Avenue,
St. Louis, Missouri
(Address of Principal Executive Offices) |
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63103
(Zip Code) |
Registrant’s telephone number, including area code:
(314) 621-0699
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, par value $0.0001 per share
Indicate by check mark whether the registrant (1) has filed
all reports required filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject
to such requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act
Rule 12b-2). Yes o No þ
There is no non-voting common equity. The aggregate market value
of the common stock held by nonaffiliates (based upon the
closing price of $9.81 for the shares on the Nasdaq National
Market on July 2, 2004) was approximately $28,835,112, as
of July 2, 2004. For this purpose, all shares held by
directors, executive officers and shareholders beneficially
holding five percent or more of the Registrant’s common
stock have been treated as held by affiliates.
As of March 28, 2005 there were 5,102,481 shares of
the Registrant’s common stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement for
the Registrant’s 2005 Annual Meeting of Shareholders to be
filed within 120 days of the end of the Registrant’s
2004 fiscal year (the “2005 Proxy Statement”) are
incorporated by reference in Part III.
TABLE OF CONTENTS
2
PART I
General
We are a national, mall-based, specialty retailer of distinctive
footwear and accessories targeting young women who demand
quality fashion products. We sell both private label and
national brand dress, casual and sport shoes, boots, sandals and
accessories. We strive to create a fun, exciting and fashion
oriented customer experience through an attractive store
environment and an enthusiastic, well-trained sales force. Our
Bakers stores’ buying teams constantly modify our product
offering to reflect widely accepted fashion trends. As of
January 1, 2005, we operated 192 of our 220 stores under
the Bakers format, which targets young women between the ages of
12 and 29. This target customer is in a growing demographic
segment, is extremely appearance conscious and spends a high
percentage of disposable income on footwear, accessories and
apparel. Based on our analysis of our competitors, we believe
that our Bakers stores are the only national, full service
retailer specializing in moderately priced footwear for this
segment. We also operate the Wild Pair chain, which consisted of
28 stores as of January 1, 2005 and offers edgier, faster
fashion-forward footwear that reflects the attitude and
lifestyles of both women and men between the ages of 17 and 24.
As a result of offering a greater proportion of national brands,
Wild Pair has somewhat higher average prices than our Bakers
stores. As of March 28, 2005, we operated 221 stores, 194
of which were Bakers stores and 27 of which were Wild Pair
stores.
On February 10, 2004, we sold 2,160,000 shares of our
common stock in our initial public offering. We sold an
additional 324,000 shares of our common stock on
March 12, 2004 in connection with the exercise of the
over-allotment option relating to our initial public offering.
Upon consummation of our initial public offering, our
subordinated convertible debentures and our previously
outstanding shares of capital stock converted into shares of our
one class of common stock and the repurchase obligations
relating to our previously outstanding shares of capital stock
were terminated. We also issued warrants to
purchase 216,000 shares of our common stock in
connection with the offering. Please see the information set
forth herein under “Item 5. Market for
Registrant’s Common Equity and Related Stockholder
Matters” which is incorporated herein by this reference.
On February 25, 2005, we announced that we would be
restating our financial statements to correct our accounting for
landlord allowances and the commencement of lease terms. On
March 21, 2005, we filed an amended Annual Report on
Form 10-K/ A for fiscal 2003 and amended Quarterly Reports
on Form 10-Q/ A for the first three quarters of
fiscal 2004 which reflected a restatement of our financial
statements to make those corrections.
On March 11, 2005, we announced that we have changed our
fiscal year to the standard retail calendar, which closes on the
Saturday closest to the end of January. We will have a four week
transition period beginning on January 2, 2005 and ending
January 29, 2005. Our new fiscal year will begin on
January 30, 2005 and will end on January 28, 2006. The
results of the transition period will be reported on
Form 10-Q along with the results of the first quarter of
fiscal year 2005, ending April 30, 2005.
In this Annual Report on Form 10-K, we refer to the fiscal
years ended December 30, 2000, January 5, 2002,
January 4, 2003, January 3, 2004 and January 1,
2005 and the fiscal year ending January 28, 2006 as
“fiscal year 2000,” “fiscal year 2001,”
“fiscal year 2002,” “fiscal year 2003,”
“fiscal year 2004” and “fiscal year 2005,”
respectively. We refer to the transition period from
January 2, 2005 through January 29, 2005 as the
“transition period.” For more information, please see
“Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Fiscal
Year,” appearing elsewhere herein. When this report uses
the words “Company,” “we,” “us” or
“our,” these words refer to Bakers Footwear Group,
Inc., unless the context otherwise requires.
3
Entry into Agreement for Private Placement
On March 31, 2005, we entered into a definitive securities
purchase agreement with six institutional “accredited
investors” for the private placement, pursuant to
Regulation D under the Securities Act of 1933, of
1,000,000 shares of our common stock, par value
$0.0001 per share, and warrants to purchase
250,000 shares of our common stock at an exercise price of
$10.18 per share (the “Private Placement”). Under the
purchase agreement, we would receive aggregate gross proceeds of
$8.75 million. Net proceeds to us are expected to
approximate between $7.25 million and $7.5 million. We
intend to use the net proceeds to open new stores, remodel
existing stores, repay indebtedness under our revolving line of
credit and for other working capital purposes. The Private
Placement is subject to customary closing conditions in the
purchase agreement and will terminate if not closed on or prior
to April 15, 2005. At the closing of the Private Placement
we will also be issuing warrants to purchase 125,000 shares
of our common stock to the placement agent in the offering at an
exercise price of $10.18 per share. The placement agent
would also be entitled to receive placement fees of
approximately $700,000 plus reimbursement of certain expenses.
In connection with the Private Placement, we have agreed to
provide certain registration rights under the Securities Act of
1933 to the investors and the placement agent relating to the
shares of common stock purchased and shares of common stock
issuable pursuant to the warrants. As part of our registration
obligations, we will be subject to liquidated damages penalties
equal to 1.0% of the aggregate purchase price for each
30 day period or pro rata for any portion thereof in excess
of our allotted time if the required registration statement is
not filed within 30 days of closing, if it is not effective
within 90 days after the closing of the Private Placement
(120 days if the registration statement is reviewed by the
SEC), or if after effectiveness sales cannot be made pursuant to
the registration statement for any reason, subject to our right
to suspend use of the registration statement for certain periods
of time in certain circumstances. We will be filing a Current
Report on Form 8-K within the prescribed time responsive to
the requirements of that form which will provide additional
detail relating to the Private Placement.
If the Private Placement were not to close, we would expect to
open 25-30 new stores in fiscal 2005, substantially all in our
new format. We expect the net proceeds of the Private Placement
to allow us to open an additional 10 stores in the fall of 2005
and to target the opening of 35-40 new stores in fiscal 2006,
substantially all in the new format.
All of the forward-looking statements herein are subject to the
risk and uncertainty that the Private Placement will not occur
and as to its final terms, if any, and the impact of such
transactions on our operating results and financial position.
Company History
We were founded in 1926 as Weiss-Kraemer, Inc., which was later
renamed Weiss and Neuman Shoe Co., a regional chain of footwear
stores. In 1997, we were acquired principally by our current
chief executive officer, Peter Edison, who had previously spent
12 years in various senior management positions at Edison
Brothers Stores, Inc. In June 1999, we teamed with Bakers’
existing management to purchase selected assets of the Bakers
and Wild Pair chains, including approximately 200 store
locations and merchandise inventory from Edison Brothers, which
had filed for bankruptcy protection in March 1999. We also
retained the majority of Bakers’ employees, including key
senior management, merchandise buyers, store operating personnel
and administrative support personnel. At the time of the
acquisition, we had approximately 60 Weiss and Neuman locations,
which we have subsequently closed or re-merchandised into the
Bakers or Wild Pair formats. In February 2001, we changed our
name to Bakers Footwear Group, Inc.
We operate as one business segment for accounting purposes. See
“Item 6. Selected Financial Data.” and
“Item 8. Financial Statements and Supplementary
Data.” We are incorporated under the laws of the State of
Missouri. Our executive offices are located at 2815 Scott
Avenue, St. Louis, Missouri 63103 and our telephone number
is (314) 621-0699. Information on the retail website for
our Bakers stores, www.bakersshoes.com, is not part of this
Annual Report on Form 10-K.
4
Competitive Advantages
We believe our long operating history and management expertise
provide us several key competitive advantages that have
historically allowed us to operate our stores to generate strong
cash flow and operating margins.
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Our Reputation as a Leading Fashion Footwear Retailer for
Young Women. |
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We strive to be the store of choice for young women between the
ages of 12 and 29 who seek quality, fashionable footwear at an
affordable price. Based on our analysis of our competitors, we
believe we are the only national, full service retailer
specializing in serving this segment. We provide a high energy,
fun shopping experience and attentive, personal service
primarily in highly visible fashion mall locations. |
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The average retail prices of our private label footwear
generally range from $39 to $65. We are able to offer these
prices without sacrificing merchandise quality, creating a high
perceived value, promoting multiple sale transactions, and
allowing us to build a loyal customer base. |
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Our micro-merchandising strategy enables us to adapt our store
inventories with the trends and demographics of individual
locations. As a result, we are able to stock the styles our
customers desire, increasing sales and customer loyalty. |
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Our marketing initiatives foster additional customer loyalty,
while expanding our presence in serving our target market. This
can be exemplified by our successful introduction of our Bakers
Frequent Buyer Card, which our customers purchase to obtain a
discount on all future purchases until the expiration of the
card. |
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A Disciplined Management Approach. |
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We believe our senior management team combines a unique blend of
experience with our company and other national specialty
retailers. Our six-member senior management team averages
approximately 25 years of individual experience in footwear
and accessories retailing. |
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Our organizational structure is designed to respond to the
changes that are inherent in our business. Our senior
management, merchandisers and buyers work closely with our
flexible network of manufacturing sources and efficient
third-party distribution system to give our customers the styles
they demand in a timely manner. |
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During the recent challenges in the retail environment, our
senior management team utilized our management structure to
effectively control overhead and our administrative operations.
We also reacted quickly to changes in consumer demand and
strategically reduced inventory purchases to reduce the need for
markdowns and clearance merchandise. |
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We intend to continually focus on improving profitability by: |
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Leveraging our investment in corporate infrastructure. We have
invested in technology, including integrated inventory
management and logistics systems, point of sale systems and
equipment, and planning and allocation systems. Because these
information systems and personnel costs are primarily fixed, as
net sales increase, our profitability should increase at a
greater rate. |
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Improving our inventory turns through the use of our new
planning, allocation and assortment planning systems, and
through the increase in our mix of branded products, which
should lead to fewer markdowns. |
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Constantly reviewing our store locations and proactively closing
underperforming stores and remodeling older stores, while
building new stores with attractive unit economics. |
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A key factor in our ability to offer our merchandise at moderate
prices and respond quickly to changes in consumer trends is our
sourcing proficiency. We rely primarily on third party foreign
manufacturers in China, Brazil, Italy, Spain and other countries
for the production of our private label merchandise. Our buying
agents have long-term relationships with these manufacturers and
have been successful in minimizing the lead times for sourcing
merchandise. These relationships have allowed us to work very
close to our expected delivery dates and reduce our markdowns.
In addition, our “test and react” strategy supported
by these strong relationships with manufacturers allows our
merchandising and buying teams to test new styles and react
quickly to fashion trends, while keeping fast-moving inventory
in stock.
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Advanced Inventory Management Systems. |
In fiscal year 2003, we completed the final step in the
implementation and integration of our planning, purchasing,
allocation, assortment planning and point of sale systems. These
systems allow us to better execute our micro-merchandising
strategy through more efficient management and allocation of our
store inventories to reduce further our response times in
reaction to fashion trends. Our micro-merchandising strategy
requires us to adapt the merchandise mix by location, with
different assortments depending on store level customer
demographics. We now have the capability to constantly monitor
inventory levels and purchases by store, enabling us to manage
our merchandise mix.
We believe that effective use of our systems has allowed us to
reduce markdowns, resulting in higher gross margins. We believe
that our systems facilitate the process of reducing inventory
commitments in light of changes in consumer demand. We believe
that our buyers and inventory management team are able to
efficiently adjust our store inventory levels to effectively
control excess inventory and markdowns.
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Flexible Store Location Strategy. |
Our multiple concepts and variety of formats within these
concepts allow us to operate profitably in a wide range of
shopping malls. New and remodeled Bakers stores located in A and
B malls have been designed in a new format. As of
January 1, 2005 we have 73 stores featuring this new format
which have shown stronger sales and profits than non-remodeled
stores. We continue to operate lower cost formats in C malls
which can generate the same return on investment as the new
format stores. Additionally, our Wild Pair concept, operating at
a similar return on investment, can succeed in smaller spaces
than those typically required by Bakers stores. Wild Pair’s
higher sales per square foot often allow it to operate in some
higher-end malls as well. This flexibility to operate in a wide
variety of malls enhances Bakers’ potential to grow and
supports strong landlord relationships with the national real
estate developers.
Strategy
Our goal is to position Bakers as the fashion footwear
merchandise authority for young women. We intend to effect this
strategy through:
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Opening New Stores in Key Locations. |
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We plan to open new stores in a controlled and disciplined
manner. Our strong relationships with landlords allow us to
secure desirable locations in fashion malls. In selecting a
specific site, we look for high traffic locations primarily in
regional shopping malls. We evaluate proposed sites based on the
traffic patterns, type and quality of other tenants, average
sales per square foot achieved by neighboring stores, lease
terms and other factors considered important with respect to the
specific location. |
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Once we have identified a key location and secured a lease, we
build our store in our distinctive new upscale contemporary
format. We expect these new stores to average approximately
$790,000 a year in store volume and to contribute approximately
$110,000 of cash flow per year in their second year of
operations. We have identified 200 additional locations for new
format stores and plan to open approximately 25 to 30 new stores
in fiscal year 2005. Assuming the successful consummation of the |
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Private Placement, we expect to open an additional 10 stores in
the fall of 2005 and target an additional 35-40 new stores in
fiscal 2006. |
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While we are not currently in negotiations, from time to time,
we will explore acquisitions of regional chains or groups of
stores. Historically, we have been able to acquire stores at
prices below our cost to open new stores. For example, in fiscal
year 2002, we spent $1.8 million to acquire 33 former
Sam & Libby locations. We spent approximately $360,000
to convert those 33 locations into our formats. The expenditures
consisted mainly of minor remodeling, signage, and point of sale
equipment and software, and averaged approximately $11,000,
excluding inventory, for each location. These costs are
considerably below our typical cash outlay to open a new store
of $230,000, and accordingly, these stores have had a
substantially higher return on invested capital. |
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Management believes that the operating infrastructure we have in
place is capable of integrating a significant number of new
stores with little additional increase in general and
administrative expenses. Virtually all of our senior management
executives have held similar positions at specialty retail
chains of substantially greater size. We believe that our buying
teams have sufficient levels of experience to support our
expected new store growth. Finally, we believe that our
information and logistics systems are scalable to support
significant growth. |
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We opened 17 new stores in fiscal 2004, 3 in fiscal 2003 and a
total of 41 stores in key locations in fiscal year 2002,
including the 33 former Sam & Libby stores we acquired.
As of March 28, 2005, we have opened 5 stores in fiscal
2005. |
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Expanding Presence of New Format Stores. |
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We are in the process of remodeling existing Bakers stores into
our new format design which will provide a consistent look with
our newly opened stores. Through January 1, 2005, 73 Bakers
stores have been opened in or remodeled into the new store
format. Sales at the remodeled stores showed significant
increases in volume after they are opened in the new format. We
believe the new format stores average higher annual sales
because they feature a distinctive upscale contemporary format
that is attractive to our customers. |
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Construction costs to remodel stores into the new format average
approximately $200,000 to $275,000 and the remodeling requires
the store to be closed for six to seven weeks. We plan to
remodel existing stores into the new format in locations where
we believe the additional investment will produce a higher
return on investment than maintaining the current format. We
remodeled 14 stores in 2004 into the new format. We plan to
remodel approximately 20 existing stores into the new format
during fiscal 2005. Assuming the successful consummation of the
Private Placement, we expect to remodel an additional 5 stores
into the new format in fiscal 2005. We have identified
approximately 60 additional stores to be upgraded. Typically,
our stores are remodeled in connection with lease renewals.
Construction management for the remodeling is provided by third
party contractors for fixed fees. |
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In addition to transforming stores into the new concept, we are
performing minor remodeling at selected stores. Typically, the
minor remodeling is undertaken in conjunction with the signing
of a new lease. Construction costs for the minor remodels
average $40,000. These stores often generate lower sales volume
but a similar return on investment. |
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Continuously Introducing New Merchandise to Maintain
Inventory Freshness. |
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We keep our product mix fresh and on target by constantly
testing new fashions and actively monitoring sell-through rates
in our stores. Our team of footwear retailers, in-house
designers and merchants use their industry experience,
relationships with agents and branded footwear producers, and
their participation in industry trade shows to analyze,
interpret and translate fashion trends affecting today’s
young women into the footwear and accessory styles they desire. |
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We employ a test and react strategy that constantly updates our
product mix while minimizing inventory risk. This strategy is
supported by our strong relationships with manufacturers which
allow |
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our merchandising and buying teams to negotiate short
lead-times, enabling us to test new styles and react quickly to
fashion trends and keep fast-moving inventory in stock. |
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To complement the introduction of new merchandise, we view the
majority of our styles as “core” fashion styles that
carry over for multiple seasons. Our merchants make subtle
changes to these styles each season to keep them fresh, while
reducing our fashion risk exposure. |
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Increasing the Sale of Branded Merchandise. |
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Approximately 17.4% of our net shoe sales for fiscal year 2004
consisted of branded footwear, up from 9.3% in fiscal year 2000.
Bakers stores began to sell national branded footwear in fiscal
year 2000 because we believe that branded merchandise is
important to our customers, adds credibility to our stores and
drives customer traffic, increasing our overall sales volume and
profitability, while reducing our overall exposure to fashion
risk. |
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We believe the further penetration of national branded
merchandise as a percentage of our product mix will be a key
driver of same store sales growth, as it serves to increase
customer traffic and customer loyalty in our stores, which we
believe will also increase the sales of our private label
merchandise. |
Product Development and Merchandising
Our merchants analyze, interpret and translate current and
emerging lifestyle trends into footwear and accessories for our
target customers. Our merchants and senior management use
various methods to monitor changes in culture and fashion.
For example, we monitor current music, television, movie and
magazine themes as they relate to clothing and footwear styles.
Our buyers travel to major domestic and international markets,
such as New York, London and Milan, to gain an understanding of
fashion trends. We attend major footwear trade shows and analyze
various information services which provide broad themes on the
direction of fashion and color for upcoming seasons.
A crucial element of our product development is our test and
react strategy, which lowers our inventory risk. We typically
buy small quantities of new footwear and deliver merchandise to
a cross-section of stores. We closely monitor sell-through rates
on test merchandise and, if the tests are successful, quickly
re-order product to be distributed to a larger base of stores.
Frequently, in as little as a week, we can make initial
determinations as to the results of a product test.
In addition to our test and react strategy, we can also reduce
our fashion risk exposure by increasing the national branded
component of our merchandise mix. The national brands carried by
our stores tend to focus on fashion basic merchandise supported
by national advertising by the producer of the brand, which
helps generate demand from our target customer. We believe we
gain substantial brand affinity by carrying these lines. We
believe that a customer who enters our store with the intent of
shopping for national branded footwear will also consider the
purchase of our lower price, higher gross margin private label
merchandise.
Product Mix
We sell both casual and dress footwear. Casual footwear includes
sport shoes, sandals, athletic shoes, outdoor footwear, casual
daywear, weekend casual, casual booties and tall-shafted boots.
Dress footwear includes career footwear, tailored shoes, dress
shoes, special occasion shoes and dress booties.
Our private label merchandise, which comprised over 82.6% of our
net shoe sales in our stores for fiscal year 2004, is generally
sold under the Bakers label and, in some instances, is supplied
to us on an exclusive basis. Once our management team has
arrived at a consensus on fashion themes for the upcoming
season, our buyers translate these themes into our merchandise.
We currently have two dress footwear buyers, three casual
footwear buyers and two accessory buyers.
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To produce our private label footwear, we generally begin with a
shoe that our buying teams have discovered during their travels
or that is brought to us by one of our commissioned buying
agents. Working with our agents, we develop a prototype shoe,
which we refer to as a sample. We control the process by
focusing on key color, fabric and pattern selections, and
collaborate with our buying agents to establish production
deadlines. Once our buyers have approved the sample, our buying
agents arrange for the purchase of necessary materials and
contract with factories to manufacture the footwear to our
specifications.
We establish manufacturing deadlines in order to ensure a
consistent flow of inventory into the stores. Our disciplined
product development process has led to a reduction in lead
times. Depending upon where the shoes are produced and where the
materials are sourced, we can have shoes delivered to our stores
in four to eight weeks. For more information, please see
“— Sourcing and Distribution.”
Our success depends upon our customers’ perception of new
and fresh merchandise. Our test and react strategy reduces our
risk on new styles of footwear. We also reduce our markdown risk
by re-interpreting our core product. Approximately one-half of
our private label mix is core product, which we define as styles
that carry over for multiple seasons. Our buyers make changes to
core product which include colors, fabrications and modified
styling to create renewed interest among our customers. We also
have relationships with some producers of national brands that,
from time to time, produce comparable versions of their branded
footwear under our private label brands.
Our information systems are designed to identify trends by item,
style, color and/or size. In response, our merchandise team
generates a key-item report to more carefully monitor and
support sales, including reordering additional units of certain
items, if available. Merchandising teams and buyers work
together to develop new styles to be presented at monthly
product review and selection meetings. These new styles
incorporate variations on existing styles in an effort to
capitalize further on the more popular silhouettes and heel
heights or entirely new styles and fabrications that respond to
emerging trends or customer preferences.
In 2000, our Bakers stores began to carry nationally recognized
branded merchandise which we believe increases the
attractiveness of our product offering to our target customers.
Our branded shoe sales comprised approximately 9.3% of net shoe
sales in fiscal year 2000, 13.6% in fiscal year 2001, 19.0% in
fiscal year 2002, 17.1% for fiscal year 2003, and 17.4% for
fiscal year 2004. We believe that branded merchandise is
important to our customers, adds credibility to our stores and
drives customer traffic resulting in increased customer loyalty
and sales. Important national brands in our stores include
Skechers®, Guess Sport®, Steve Madden®,
Diesel®, bebe®and Chinese Laundry®. We believe
offering nationally recognized brands is a key element to
attracting appearance conscious young women. We believe it is
strategically important to increase the branded component of our
merchandise mix, which should drive comparable store sales.
Branded merchandise sells at a higher price point than our
private label merchandise. As a result, despite a lower gross
margin percentage, branded merchandise generates greater gross
profits per pair and leverages our operating costs.
Our accessories include handbags, jewelry, sunglasses, ear clips
and earrings, hosiery, scarves and other items. Our accessory
products allow us to offer the convenience of one-stop shopping
to our customers, enabling them to complement their seasonal
ready-to-wear clothing with color coordinated footwear and
accessories. Accessories add to our overall sales and typically
generate higher gross margins than our footwear. Our average
selling price for handbags is $15, and for all accessories,
excluding handbags, the average selling price is $5.
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The following table illustrates net sales by merchandise
category as a percentage of our total net sales for fiscal years
2001, 2002, 2003 and 2004:
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Private Label Footwear
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79.6 |
% |
|
|
73.0 |
% |
|
|
75.0 |
% |
|
|
74.0 |
% |
|
Branded Footwear
|
|
|
12.5 |
% |
|
|
17.2 |
% |
|
|
15.5 |
% |
|
|
15.6 |
% |
|
Accessories
|
|
|
7.9 |
% |
|
|
9.8 |
% |
|
|
9.5 |
% |
|
|
10.4 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
We have developed a micro-merchandising strategy for each of our
Bakers stores through market research and sales experience. We
maintain the level and type of styles demanded by subsets of our
target customers. We have categorized each of our Bakers stores
as being predominantly a mainstream, fashion or urban location,
and if appropriate we identify subcategories for certain stores.
We have implemented a similar micro-merchandising strategy for
our Wild Pair stores.
Our micro-merchandising strategy of classifying multiple stores
and merchandising them similarly based upon customer
demographics enables our merchants to provide an appropriate
merchandise mix in order to meet that particular store’s
customers’ casual, weekend/club, career and special
occasion needs. In determining the appropriate merchandise mix
and inventory levels for a particular store, among other
factors, for a particular store’s profile, we consider:
|
|
|
| |
• |
selling history; |
| |
| |
• |
importance of branded footwear; |
| |
| |
• |
importance of accessories; |
| |
| |
• |
importance of aggressive fashion; |
| |
| |
• |
the stock capacity of the store; and |
| |
| |
• |
sizing trends and color preferences. |
Our merchandising plan includes sales, inventory and
profitability targets for each product classification. This plan
is reconciled with our store sales plan, a compilation of
individual store sales projections that is developed biannually,
but reforecasted monthly. We also update the merchandising plan
on a monthly basis to reflect current sales and inventory
trends. The plan is then distributed throughout the
merchandising department, which analyzes trends on a weekly, and
sometimes daily, basis. We use the reforecasted merchandising
plan to adjust production orders as needed to meet inventory and
sales targets. This process keeps tight control over our
inventory levels and reduces markdowns.
Our buyers typically order merchandise 60 to 90 days in
advance of anticipated delivery. Frequently, we order
merchandise 30 to 60 days in advance of anticipated
delivery. This strategy allows us to react to both the positive
and negative trends and customer preferences identified through
our information systems and other tracking procedures. Through
this purchasing strategy, we can take advantage of positive
trends by quickly replenishing our inventory of popular
products. This strategy also reduces our exposure to risk
because we are less likely to be overstocked with less desirable
items. During the recent challenging retail environment, we
reacted quickly to declining sales trends by reducing purchases
and keeping inventories in line to manage our markdown exposure.
10
We utilize rigorous clearance and markdown procedures to reduce
our inventory of slower moving styles. Our management carefully
monitors pricing and markdowns to facilitate the introduction of
new merchandise and to maintain the freshness of our fashion
image.
We have five clearance sales each year, which coincide with the
end of a particular selling season. For more information
regarding our selling seasons, please see “Item 7.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations — Seasonality and Quarterly
Fluctuations.” During a clearance sale, we instruct our
stores systematically to lower the price of the items, and if
not sold, to ship them to 10 to 12 of our stores which have
special clearance sections. We believe that our test and react
strategy and our careful monitoring of inventories and consumer
buying trends help us to reduce sales at clearance prices.
Stores
|
|
|
Store Locations and Environment. |
Our stores are designed to attract customers who are intrigued
by a young and contemporary lifestyle and to create an inviting,
exciting atmosphere in which it is fun for them to shop in
locations where they want to shop. Our stores average
approximately 2,400 square feet and are primarily located
in regional shopping malls. Seven of our stores, which are
located in dense urban markets such as New York City and
Chicago, have freestanding street locations.
Our stores are designed to create a clean, upscale boutique
environment, featuring contemporary finishings and sophisticated
details. Glass exteriors allow passersby to see easily into the
store from the high visibility, high traffic locations in the
malls where we have located most of our stores. The open floor
design allows customers to readily view the majority of the
merchandise on display while store fixtures allow for the
efficient display of accessories.
Following is a list of our stores by state as of January 1,
2005
| |
|
|
|
|
| |
|
No. | |
| |
|
Stores | |
| |
|
| |
|
Alabama
|
|
|
1 |
|
|
Arizona
|
|
|
4 |
|
|
Arkansas
|
|
|
1 |
|
|
California
|
|
|
31 |
|
|
Colorado
|
|
|
4 |
|
|
Connecticut
|
|
|
2 |
|
|
Delaware
|
|
|
1 |
|
|
Florida
|
|
|
18 |
|
|
Georgia
|
|
|
15 |
|
|
Idaho
|
|
|
1 |
|
|
Illinois
|
|
|
18 |
|
|
Indiana
|
|
|
5 |
|
|
Kansas
|
|
|
1 |
|
|
Louisiana
|
|
|
5 |
|
|
Maryland
|
|
|
6 |
|
|
Massachusetts
|
|
|
6 |
|
|
Michigan
|
|
|
9 |
|
|
Minnesota
|
|
|
2 |
|
|
Missouri
|
|
|
7 |
|
11
| |
|
|
|
|
| |
|
No. | |
| |
|
Stores | |
| |
|
| |
|
Nebraska
|
|
|
2 |
|
|
Nevada
|
|
|
3 |
|
|
New Hampshire
|
|
|
1 |
|
|
New Jersey
|
|
|
9 |
|
|
New Mexico
|
|
|
1 |
|
|
New York
|
|
|
17 |
|
|
North Carolina
|
|
|
2 |
|
|
Ohio
|
|
|
6 |
|
|
Oklahoma
|
|
|
2 |
|
|
Pennsylvania
|
|
|
7 |
|
|
Rhode Island
|
|
|
1 |
|
|
South Carolina
|
|
|
1 |
|
|
Texas
|
|
|
19 |
|
|
Utah
|
|
|
3 |
|
|
Virginia
|
|
|
4 |
|
|
Washington
|
|
|
2 |
|
|
Wisconsin
|
|
|
3 |
|
| |
|
|
|
|
Total Stores
|
|
|
220 |
* |
|
Total States
|
|
|
36 |
|
|
|
| * |
Excludes our Internet site, which is merchandised as a Bakers
store. |
Every three weeks, we provide the stores with specific
merchandise display directions from the corporate office. Our
in-store product presentation utilizes a variety of different
fixtures to highlight the breadth of our product line. Various
fashion themes are displayed throughout the store utilizing
combinations of styles and colors.
We operate our stores under two different concepts, Bakers and
Wild Pair. As of January 1, 2005, 192 of our stores were
Bakers stores and 28 stores were Wild Pair stores. As of
March 28, 2005, we operated 221 stores, 194 of which were
Bakers stores and 27 of which were Wild Pair stores.
Our Bakers stores focus on widely-accepted, mainstream fashion
and provide a fun, high-energy shopping environment geared
toward young women between the ages of 12 and 29.
Our Wild Pair stores feature fashion-forward merchandise for hip
young women and men between the ages of 17 and 24 and are
becoming recognized for reflecting the attitude and lifestyle of
this demographic niche. The Wild Pair customer demands edgier,
faster fashion that exists further towards the “leading
edge” than does the typical Bakers customer, which allows
us to better monitor the direction of the fashion-forward look
that our Bakers customer will be seeking. To match the attitude
of our Wild Pair merchandise, we have created a “club”
atmosphere and a fast, fun environment within our Wild Pair
stores.
Wild Pair stores carry a higher proportion of branded
merchandise, which generally sells at higher price points than
our Bakers footwear.
12
The following table compares our Bakers and Wild Pair formats:
| |
|
|
|
|
|
| |
|
Bakers |
|
Wild Pair |
| |
|
|
|
|
Target customer:
Key brands |
|
Women — ages 12-29 Skechers®, Guess
Sport®, Steve Madden®, bebe®, Diesel® and
Chinese Laundry® |
|
Men & women — ages 17-24 Steve
Madden®, Steve Madden Men’s®, Guess Sport®,
Skechers®, Candies®, Chinese Laundry®, Diesel
Women’s®, Diesel Men’s®, Luichiny®,
Rocket Dog®, Volatile®, Perry Ellis Men’s®
and Puma® |
|
Fashion content:
|
|
Widely-accepted |
|
Edgy, lifestyle-based |
|
Number of stores (as of
|
|
|
|
|
| |
January 1, 2005):
|
|
192 |
|
28 |
|
Approximate average size:
|
|
2,450 square feet |
|
1,800 square feet |
Our stores can operate profitably in a wide range of mall
classifications. We principally open our new stores in malls
that are considered “A” and “B” locations.
However, some of our stores are located in malls that are less
attractive and do not warrant the investment required to fully
remodel a store at its lease renewal. However, we will continue
to operate these stores as long as they meet profitability
requirements. In addition, these stores are valuable in
maintaining strong relationships with our national landlords.
Many of these stores are larger in size than our newly designed
stores, but have significantly lower per square foot occupancy
costs.
We expect new stores to average approximately $790,000 per
year in store volume and contribute approximately $110,000 of
cash flow from operating activities per year. Our typical cash
outlay to open a new store is approximately $230,000.
We closed 10 stores in fiscal year 2002, 21 stores in fiscal
year 2003 and 12 stores in fiscal 2004. We closed an additional
four stores in fiscal year 2005 through March 28, 2005.
Our store operations are organized into three divisions, east,
central and west, which are subdivided into 16 regions. Each
region is managed by a regional manager, who is typically
responsible for 12 to 16 stores. Each store is typically staffed
with a manager and an assistant manager, in addition to
approximately five sales associates. In some markets where
stores are more closely located, one of the store managers may
also act as an area manager for the stores in that area,
assisting the regional manager for those stores.
Our regional managers are primarily responsible for the
operation and results of the stores in their region, including
the hiring or promotion of store managers. We develop new store
managers by promoting from within and selectively hiring from
other retail organizations. Our store managers are primarily
responsible for sales results, customer service training, hiring
of store level staff, payroll control and shortage control.
Merchandise selections, inventory management and visual
merchandising strategies for each store are largely determined
at the corporate level and are communicated by email to the
stores generally on a weekly basis.
Our commitment to customer satisfaction and service is an
integral part of building customer loyalty. We seek to instill
enthusiasm and dedication in our store management personnel and
sales associates through incentive programs and regular
communication with the stores. Sales associates receive
commissions on sales with a guaranteed minimum hourly
compensation. From time to time, we run sales contests to
encourage our sales associates to maximize sales volume. Store
managers receive base compensation plus incentive compensation
based on sales and inventory control. Regional and area managers
receive base compensation plus incentive compensation based on
meeting profitability benchmarks. Each of our managers controls
the payroll hours used each week in conjunction with a budget
provided by the regional manager.
13
We have well-established store operating policies and procedures
and use an in-store training regimen for all new store
employees. On a regular basis, our merchandising staff provides
the stores with merchandise presentation instructions, which
include diagrams and photographs of fixture presentations. In
addition, our internal newsletter provides product descriptions,
sales histories and other milestone information to sales
associates to enable them to gain familiarity with our product
offerings and our business. We offer our sales associates a
discount on our merchandise to encourage them to wear our
merchandise and to reflect our lifestyle image both on and off
the selling floor.
Our regional managers are responsible for maintaining a loss
prevention program in each of our stores. Our loss prevention
efforts include monitoring returns, voided transactions,
employee sales and deposits, as well as educating our store
personnel on loss prevention. We monitor inventory through
electronic receipt acknowledgment to better monitor loss
prevention factors, which allows us to identify variances and
further to reduce our losses due to damage, theft or other
reasons. Since these systems were implemented, our shrinkage has
dropped significantly. In addition to these internal control
measures, we commission an independent loss prevention audit
twice per year.
Sourcing and Distribution
We source each of our private label product lines separately
based on the individual design, styling and quality
specifications of those products. We do not own or operate any
manufacturing facilities and rely primarily on third party
foreign manufacturers in China, Brazil, Italy, Spain, and other
countries for the production of our private label merchandise.
We believe that this sourcing of footwear products and our short
lead times minimize our working capital investment and inventory
risk, and enable efficient and timely introduction of new
product designs. Although we have not entered into any long-term
manufacturing or supply contracts, we believe that a sufficient
number of alternative sources exist for the manufacture of our
products. The principal materials used in the manufacture of our
footwear and accessory merchandise are available from any number
of domestic or international sources.
Management, or its agents, performs an array of quality control
inspection procedures at stages in the production process,
including examination and testing of:
|
|
|
| |
• |
prototypes of key products prior to manufacture; |
| |
| |
• |
samples and materials prior to production; and |
| |
| |
• |
final products prior to shipment. |
Through 2003 substantially all merchandise for our stores was
initially received, inspected, processed and distributed through
one of our two distribution centers, each of which is part of a
third-party warehousing system. In 2004, we implemented new
procedures in which we are shipping a substantial amount of
products sourced from China directly to our stores through Los
Angeles, California, rather than shipping them first to our west
coast distribution center in Los Angeles. The remaining
merchandise that is manufactured in Asia is delivered to our
west coast distribution center and merchandise that is
manufactured elsewhere in the world is delivered to our east
coast distribution center located near Philadelphia,
Pennsylvania. In accordance with our micro-merchandising
strategy, our allocation teams determine how the product should
be distributed among the stores based on current inventory
levels, sales trends, specific product characteristics and the
buyers’ input. Merchandise typically is shipped to the
stores as soon as possible after receipt in our distribution
center using third party carriers, and any goods not shipped to
stores are stored in warehouse space in St. Louis, Missouri
for replenishment purposes.
Information Systems and Technology
Our information systems integrate our individual stores,
merchandising, distribution and financial systems. Daily sales
and cash deposit information is electronically collected from
the stores’ point of sale terminals nightly. This allows
management to make timely decisions in response to market
conditions. These
14
include decisions about pricing, markdowns, reorders and
inventory management. Our customers use cash, checks and
third-party credit cards to purchase our products. We do not
issue private credit cards or make use of complicated financing
arrangements.
Recently, our focus is the further integration of our planning,
purchasing and point of sale systems. We have recently completed
the transition to a new point of sale system and implemented
Arthur Allocation and MarketMax assortment planning. These new
systems allow us to better execute our micro-merchandising
strategy through more efficient management and allocation of our
store inventories to reduce further our response times in
reaction to fashion trends. In addition, these systems also
allow us to identify and reduce our losses due to damage, theft
or other reasons, and to improve monitoring of employee
productivity.
Marketing Through In-Store Advertising
Our marketing consists primarily of an in-store, high-impact,
visual advertising campaign. Marketing materials are
particularly positioned to exploit our high visibility, high
traffic mall locations. Banners in our windows and signage on
our walls and tables may highlight a particular fashion story, a
seasonal theme or a featured piece of merchandise. We utilize
promotional giveaways or promotional event marketing.
To cultivate brand loyalty, we successfully introduced our
Bakers Frequent Buying Card program nationwide in late 2001.
This program allows our customers to purchase a plastic,
bar-coded card bearing our logo in order to obtain a discount on
all future purchases in our stores until the expiration of the
card. We believe that this program has improved customer loyalty.
Competition
We believe that our Bakers stores have no direct national
competitors who specialize in full-service, moderate-priced
fashion footwear for young women. Yet, the footwear and
accessories retail industry is highly competitive and
characterized by low barriers to entry.
Competitive factors in our industry include:
|
|
|
| |
• |
brand name recognition; |
| |
| |
• |
product styling; |
| |
| |
• |
product quality; |
| |
| |
• |
product presentation; |
| |
| |
• |
product pricing; |
| |
| |
• |
store ambiance; |
| |
| |
• |
customer service; and |
| |
| |
• |
convenience. |
We believe that we match or surpass our competitors on the
competitive factors that matter most to our target customer. We
offer the convenience of being located in high-traffic,
high-visibility locations within the shopping malls in which our
customer prefers to shop. We have a focused strategy on our
target customer that offers her the fun store atmosphere, full
service and style that she desires.
Several types of competitors vie for our target customer:
|
|
|
| |
• |
department stores (such as Bloomingdale’s, Dillard’s,
Macy’s and May Department Stores); |
| |
| |
• |
national branded wholesalers (such as Candie’s, Nine West,
Steve Madden and Vans); |
| |
| |
• |
national branded off-price retailers (such as DSW, Rack Room and
Shoe Carnival); |
| |
| |
• |
national specialty retailers (such as Finish Line,
Journey’s, Naturalizer and Aldo’s); |
| |
| |
• |
regional chains (such as Cathy Jean and Sheik); |
15
|
|
|
| |
• |
discount stores (such as Wal-Mart, Target and K-Mart); and, to a
lesser extent, |
| |
| |
• |
apparel retailers (such as bebe, Charlotte Russe, Express,
Rampage and Wet Seal). |
Department stores generally are not located within the interior
of the mall where our target customer prefers to shop with her
friends. National branded wholesalers generally have a narrower
line of footwear with higher average price points and target a
more narrowly focused customer. Specialty retailers also cater
to a different demographic than our target customer. Regional
chains generally do not offer the depth of private label
merchandise that we offer. National branded off-price retailers
and discount stores do not provide the same level of fashion or
customer service. Apparel retailers, if they sell shoes or
accessories, generally offer a narrow line of styles, which can
encourage a customer to come to our store to purchase shoes or
accessories to complement her new outfit. Our competitors sell a
broad assortment of footwear and accessories that are similar
and sometimes identical to those we sell, and at times may be
able to provide comparable merchandise at lower prices. While
each of these different distribution channels may