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Hat World shows sign of recovering from lackluster year

August 4, 2008

The locally based headwear retailer Hat World made a name for itself by snatching up competitors and opening hundreds of stores around the country.

However, after sluggish sales in the fiscal year that ended Feb. 2, the company--a unit of Nashville, Tenn.-based Genesco Inc.--says it plans to open fewer stores than usual this year so officials can put their focus back on existing operations.

"We pushed growth for forever it seems, and growth is still part of our story," said Ken Kocher, Hat World's president. "Now it's time to sit back and just look at what we've done, where we're at and capitalize on all of that."

The strategy, so far, seems to be working. In its fiscal first quarter, which ended May 3, the company posted a 3-percent increase in same-store sales. Those numbers represent a positive shift from its last fiscal year, when same-store sales fell 2 percent and operating profit decreased nearly 23 percent, to $32 million.

During that time, some analysts suggested that the company--which reported 19 consecutive quarters of same-store sales increases from 2001 to 2006--had lost its way.

Kocher denies that. He said the decline occurred after Major League Baseball officials decided to switch their "authentic collection" caps from wool to a synthetic material that better soaked up oil and sweat. Those hats typically account for 10 percent of the company's business, and during the transition stores didn't have the products in stock.

"That'd be like Gap changing their jeans and having to get out of their jeans and come up with a whole new pair," he said. "That's a core item, probably the most core item we have."

The company recovered, Kocher said, by focusing on the basic parts of its business, such as inventory and product selection.

In fact, much of Hat World's success stems from the company's ability to micro-manage the product selection to find the right hats for each local market, he said.

The stores average 850 square feet and stock 1,200 varieties of headwear, but styles vary greatly by location.

At urban stores, such as the Lafayette Square Mall location, fitted flat-billed hats make up about 80 percent of inventory.

Suburban stores primarily stock shelves with college and national team hats, and some action or "skateboard" brands, such as DC or Hurley, Kocher said.

He said Hat World is a "fast follower" and closely watches trends to keep stores fresh. The company also prides itself on being able to respond to big sports developments.

If the Green Bay Packers traded quarterback Brett Favre to the Minnesota Vikings, for example, Kocher said the company could quickly pump up the number of Vikings hats in its Wisconsin stores to meet demand.

Top of the heap

Hat World employs about 200 people at its headquarters and distribution center on the northeast side.

The firm has grown explosively since starting with a single store in Lafayette's Tippecanoe Mall in 1995. It now operates 850 locations worldwide.

"They are definitely the dominant player in the U.S. and probably North America," said Robert McGee, editor of Sporting Goods Intelligence, a Glen Mills, Pa.-based trade publication.

In its short history, the company has snapped up major competitors including Lids, Hat Zone and Hat Shack.

In 2004, Genesco purchased Edmonton, Alberta-based retailer Cap Connection, which has helped Hat World expand into the Canadian market. The company recently opened a Canadian distribution center and should have 40 to 50 stores open in the country by year's end.

The licensed hat industry is a $3 billion market just in the United States, said Matt Powell, a retail analyst with the Charlotte, N.C.-based market research firm SportsOneSource.

Most hat sales are driven by fans looking to support their favorite team or player, he said--a shift from the past, when children and high school students often wore caps as fashion items.

"The business has changed a lot," he said. "It's much more of a fan business."

Hat World officials say the company isn't dependent on the wins and losses of teams, although it does help in certain situations.

The company sells the most hats before a sports season kicks into gear and teams start losing, said Jon Glesing, a Hat World spokesman.

"Our business really jams at the start of the season," he said. "Everyone's optimistic about the season, they're excited about supporting their team, and buying a hat is a natural way to do that."

The average hat sells for $24 , and Kocher said the company rarely lowers its price or offers discounts.

The caps are cheap enough that consumers are unlikely to feel too strapped to buy them, even as the economy weakens, said Scott Shuler, president of Top of the World, a Norman, Okla.-based manufacturer that supplies caps to Hat World.

"Everybody can afford a $20 hat during this time," he said. "They may not be able to afford a nice leather jacket this year, but they'll be able to afford a $20 hat to support their team."

Competing for customers

Even so, Kocher said the company must compete against any business that targets a consumer's $20 to $40 of discretionary income. That includes music stores, Tshirt stands, even the food courts in shopping malls.

For that reason, the company's real estate strategy remains simple: Go wherever there is foot traffic.

In traditional malls, the company looks to place stores near restaurants, movie theaters or other crowded places, Kocher said.

The company recently opened its first casino location in Niagara Falls, Canada, and it's looking at opportunities in Las Vegas. The chain also runs 13 airport stores and one location in a train station.

"We've always been an impulse buy; we've never really seen ourselves as a hard-core destination retailer," Glesing said. "We try to put ourselves in the middle where there's a lot of people, where there's a mind-set to spend money or shop."

The company also is looking for ways to expand some of its other business units, including its custom embroidery division.

It now has stand-alone embroidery machines in 334 stores, and Kocher said that represents a "huge growth business." For $9, customers can personalize a hat with their name or other item, he said.

Jeffrey Klinefelter, a Minneapolis-based analyst with Piper Jaffray, wrote in a July note that embroidery now makes up 10 percent of store sales.

Glesing said embroidery "is a nice part of our business, but not near that 10-percent figure." He declined to provide specific figures.

Catering to kids

Beyond its main stores, the company is looking for ways to adjust its Lids Kids locations, which cater to children under age 10. The first store opened in 2006 in Castleton Square Mall, and the company now operates 15 locations. "Right now, we're tweaking the business," Kocher said. "It hasn't come out of the gates as strong as we'd like it to, but it still has potential." Lids Kids stores average 1,000 square feet, with up to 50 percent of the inventory devoted to apparel, including T-shirts and "onesies," and a bigger selection of novelty items and accessories.

As the company evaluates options for the chain, it likely will put more Lids Kids products in existing stores.

Kocher envisions opening slightly larger adult locations that could include a "store within a store" concept, with 150 square feet devoted to Lids Kids products.

George N. Berger, a Hat World founder who resigned as chairman in 1999 over philosophical differences with the company's venture-capitalist backers, said the chain's biggest challenge will be motivating employees as the business matures.

"When you have fast growth ... it's exciting, it generates an enthusiasm and a camaraderie and a natural adrenaline rush," he said. "When you're mature, you have less of that, so then you have to create an environment where people like to work."

That said, he described the business as a "typical American home run" that is simply going through normal business cycles.

"I still think it's a fabulous business," he said. "A company is just like a human being; it has highs and lows in its lifetime. But unlike a human being, it can go on for a long time."

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