BUSINESS
THIS PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE THOSE DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED UNDER
"RISK FACTORS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS."
Track 'n Trail is one of the largest specialty retailers in the United
States focusing on high-quality casual, outdoor and adventure footwear. The
Company has increased its store base and net sales each year since inception. In
addition, the Company's net income has grown at a compound annual rate of 37.5%
from $1.1 million in fiscal 1993 to $2.9 million in fiscal 1996, after giving
effect to assumed C corporation income taxes.
As of February 22, 1997, the Company operated 128 stores in 23 states under
the Track 'n Trail and Overland Trading names. All but three of these stores
were located in regional or super-regional shopping malls, concentrated in
California, the Midwest and the Northeast. Each store offers a wide range of
rugged walking and fashion casual shoes, sandals and boots featuring brands such
as Timberland, Dr. Martens, Birkenstock, Vans, Teva, Airwalk, Clarks, Ecco and
Rockport.
The Company targets middle to upper income consumers, with the Track 'n
Trail stores focusing on consumers in the 15- to 40-year-old age group and the
Overland Trading stores focusing on the 25- to 55-year-old age group. The
Company markets to these two different customer segments through distinct
merchandise assortments and store designs. The Track 'n Trail stores offer a
merchandise selection that emphasizes fashionable, performance-oriented footwear
and typically feature an all-glass front, often accented with rock fixtures, and
earth-tone interiors reminiscent of an outdoor setting. The Company's Overland
Trading stores are merchandised and designed to appeal to a slightly older and
more conservative consumer, with a focus on traditional and comfort-oriented
styles displayed in a contemporary, natural wood setting. The Company operates
these two distinct retail concepts to capitalize on the rapid population growth
in the 15- to 24-year old age group and the 40- to 55-year-old age group, which
the U.S. Bureau of the Census estimates will grow 19.6% and 28.6% from 1995 to
2010, respectively. Track 'n Trail stores average approximately 1,880 square
feet in size, while the Overland Trading stores currently average approximately
1,450 square feet. The Company operates 94 Track 'n Trail stores in 22 states,
and 34 Overland Trading stores in seven states.
The Company obtained 33 Overland Trading stores by acquiring control of
Overland Management Corporation ("Overland") on October 25, 1996. Overland
generated net sales of approximately $23.9 million and total store contribution
of approximately $2.5 million for the 12 months preceding the acquisition, under
prior management. In addition to obtaining a distinct retail venue, by acquiring
Overland the Company strengthened its presence in the northeastern United
States. The Company also believes that the acquisition increases its purchasing
power and negotiating position with suppliers and real estate developers,
permits it to realize operational economies of scale, and increases the
potential number of stores it can open in both existing and future Track 'n
Trail markets.
INDUSTRY BACKGROUND
According to published industry sources, total retail footwear sales in the
United States during 1995 were approximately $32.5 billion. Of that total,
approximately $14.7 billion, or 45.2%, was derived from casual and outdoor
shoes, boots and sandals, including hiking, work, winter weather and casual
western boots. Footwear expenditures by U.S. consumers increased 4.4% in 1995
from 1994 and increased from 13.8% of total clothing and footwear purchases to
14.0%. Nevertheless, footwear expenditures as a percent of total clothing and
footwear remain low by historical standards. By comparison, footwear accounted
for as much as 16.8% of such purchases in 1970.
The footwear industry historically has been served by a variety of retail
distribution channels, including department stores, mall-based specialty
footwear retailers, traditional shoe stores, outdoor
35
specialty retailers, sporting goods stores and other retailers. Family shoe
stores and specialty shoe stores accounted for approximately 39.4%, or $12.8
billion, of all footwear sold at retail in 1995. Management believes that few of
the retailers providing footwear in these formats are focused exclusively on
casual, outdoor and adventure footwear and, of those that are, even fewer carry
the depth and breadth of merchandise carried by the Company. Management believes
that this segment of the industry is very fragmented and that the Company is one
of the largest retailers dedicated to this niche.
OPERATING STRATEGIES
The Company's goal is to become the premier destination specialty retailer
of better casual, outdoor and adventure footwear. To accomplish its goal, the
Company is pursuing the following operational strategies:
- BRAND NAME MERCHANDISE. Management believes that brand name identity is of
paramount importance to its target customer in making footwear purchasing
decisions. The Company focuses on carrying authentic, well-established
brand names for each product category. For example, the Company offers the
Timberland brand for quality hiking, work, performance and casual boots
and shoes. For younger buyers of "alternative" footwear, the Company
offers Dr. Martens, Vans, Simple and Airwalk shoes. The Company features
the Ecco and Rockport brands in the walking shoe and rugged walking
category and the Birkenstock brand in walking sandals. In the category of
performance, water and active sandals, the Company offers the Teva brand.
Management believes that each of the foregoing brands is recognized as one
of the originals in the primary category of footwear it represents.
- CUSTOMER SERVICE AND CONVENIENCE. The Company is committed to achieving
customer satisfaction and to building a loyal customer base by providing a
high level of knowledgeable, attentive and personalized customer service.
The Company believes that educating consumers about the features and
benefits of its product offerings is a critical component of its success,
and management considers its sales associates' knowledge of the Company's
customers and products to be essential to its marketing approach and
customer satisfaction. The Company's extensive employee training and
development programs are designed to provide its field personnel with the
knowledge and skills needed to understand and communicate the performance
characteristics of the Company's merchandise, and to better serve its
customers' needs.
- CAPITALIZE ON TWO DISTINCT DEMOGRAPHIC GROUPS. Management believes that
the Company's distinct Track 'n Trail and Overland Trading retail concepts
enable it to serve two diverse and rapidly growing demographic groups.
Track 'n Trail stores are designed and merchandised to target 15- to
40-year-olds, while Overland Trading stores target 25- to 55-year-olds.
Although the customer base of the two concepts overlaps to some extent,
the Track 'n Trail concept is intended to focus more on active and
performance-oriented lifestyles, which it believes are particularly
popular with the fast-growing 15- to 24-year-old age group. The United
States Bureau of the Census estimates that the 15- to 24-year-old age
group included 36.3 million people in 1995 and will expand 19.6% to 43.4
million people by 2010. Overland Trading stores are designed to appeal
more to the large and growing 40- to 55-year-old age group, which the U.S.
Bureau of the Census estimates will grow 28.6% from 50.2 million people in
1995 to 64.5 million people in 2010. Management plans to differentiate the
two retail concepts to a greater degree in malls in which the Company
operates both concepts, and slightly less so in malls in which the Company
operates only one store.
- FOCUSED MERCHANDISING STRATEGY. To tailor merchandise mix to individual
stores' customer profiles, increase inventory efficiency and minimize lost
sales due to out-of-stock occurrences, the Company analyzes detailed sales
and inventory data generated by the Company's advanced information and
distribution systems on a daily basis. The Company's systems, which
feature automatic replenishment, point-of-sale ("POS") data collection and
electronic data interchange ("EDI"), capture net sales and inventory data
daily on a store-by-store basis for each stock keeping unit ("SKU").
36
- RECOGNIZE AND RESPOND TO CHANGING LIFESTYLE TRENDS. The Company strives to
recognize and quickly respond to lifestyle trends that affect footwear
customer preferences. Most recently, prevailing lifestyle trends that have
affected footwear sales have included (i) the growth in alternative sports
such as skate, wake and snow boarding, in-line skating and mountain biking
as well as the footwear trends these sports have inspired, (ii) the
movement to outdoor activities and to nature as evidenced by the
resurgence of walking, hiking, biking, fly fishing and camping and (iii)
the increased acceptance of casual dress for both work and social
settings.
Management believes that it has developed strong relationships with the
primary suppliers of the more than 100 brand names that the Company
carries. These relationships provide access to market information
regarding emerging merchandise trends. Management believes that the
breadth and strength of these relationships, together with the Company's
focused merchandising strategy, provide the Company with the flexibility
necessary to permit it to respond accurately and quickly to changing
customer preferences.
- ESTABLISH COMPLEMENTARY PRIVATE LABEL BRANDS. The Company's brand strategy
is complemented by its private label merchandise, which is marketed in
several product categories under brand names including Forza-TM-,
Mole-TM-, New Terrain-TM-, Nordic Trail-TM- and Coloma Trail-TM-. Private
label merchandise, which represented approximately 12.0% of total net
sales in fiscal 1996, has provided the Company with higher maintained
gross margins than branded products. The Company's private label strategy
is to offer merchandise with quality and features equal or superior to
branded products at lower prices.
GROWTH STRATEGIES
The Company's senior management team has successfully increased the store
base and net sales level each year since joining the Company, and intends to
continue to build and strengthen the Company's infrastructure. To enhance the
Company's ability to continue to grow through new store openings and
acquisitions, the Company currently plans to lease a new corporate headquarters
and distribution facility in 1998, which will be sufficient to supply at least
500 stores when expanded to its full anticipated capacity. The Company has also
made and will continue to make investments in management information systems.
Management has developed the following strategies to accelerate the Company's
growth and increase its future profitability:
- NEW STORE OPENINGS. The Company plans to strengthen its position in its
current markets by selectively opening new Track 'n Trail and Overland
Trading stores in markets with attractive demographics and in which
management believes the Company can gain economies of scale in management
and distribution. In determining new store locations, the Company
considers regional and local economic conditions, mall locations, site
locations within the mall, vacancy rates, sales per square foot, "anchor"
tenant stores, tenant mix, consumer traffic, competition and occupancy,
construction and other costs associated with opening a store. By
solidifying the Company's position in certain markets, management believes
that the Company can establish a higher degree of name recognition through
increased market representation and a correspondingly stronger market
presence. In addition, management believes that new store openings will
permit the Company to realize greater distribution efficiencies. The
Company plans to open approximately 20 stores in fiscal 1997 and
approximately 30 stores in fiscal 1998.
- COMPARABLE STORE NET SALES GROWTH. Management plans to leverage the
increased market presence and recognition gained by opening new stores to
drive comparable store net sales increases in existing markets. Management
also believes that the Company can achieve comparable store net sales
growth in its recently acquired Overland Trading stores by (i)
implementing the store-by-store sales analysis and focused merchandising
strategies employed in the Track 'n Trail stores, (ii) supplementing
existing assortments with style additions and private label merchandise,
(iii) improving inventory management to reduce lost sales due to
out-of-stock occurrences and
37
(iv) emphasizing accessories sales through the sales associate training
programs currently employed at the Track 'n Trail stores.
- GROSS MARGIN IMPROVEMENT AND OPERATING EXPENSE CONTROLS. The Track 'n
Trail store contribution for fiscal 1995 and fiscal 1996 as a percentage
of net sales was approximately six percentage points higher than that of
the recently acquired Overland Trading stores for the fiscal year prior to
the Overland acquisition. The superior performance of Track 'n Trail
stores reflects a higher maintained gross margin and better management of
store-level operating expenses. Management intends to improve the
maintained gross profit levels of the Overland Trading stores, with the
goal of achieving results similar to those of the Track 'n Trail stores,
by (i) implementing the Company's MIS systems and focused merchandising
strategies, (ii) taking advantage of increased purchasing economies of
scale, (iii) selectively eliminating less profitable styles, (iv)
increasing sales associates' emphasis on accessories sales at Overland
Trading stores and (v) broadening these stores' offering of private label
footwear, which carries higher maintained gross margins than branded
products. The Company also intends to improve management controls and
accountability at the Overland Trading stores, leveraging the systems
already in place at Track 'n Trail stores, in an effort to reduce Overland
Trading store-level expenses as a percentage of net sales.
- ADDITIONAL ACQUISITIONS. Management believes that the market for
high-quality outdoor, casual and adventure footwear is large and
fragmented. Accordingly, management intends to identify opportunities to
acquire one or more regional specialty footwear retailers in this market.
Management plans to pursue such opportunities where, as in the case of the
Overland acquisition, it believes that (i) the target company's stores are
strategically well-located within their local market and regionally
well-located within the United States, (ii) the Company can bring
merchandising and operational efficiencies and improvements to the target
company's operations, (iii) the retail concept of the target company fits
or can be easily adapted to Track 'n Trail's strategic objectives and (iv)
the acquisition can be accomplished on terms advantageous to the Company.
MERCHANDISING
The Company's merchandising philosophy is to maintain a core group of basic
styles while identifying and stocking emerging brands and styles. The Company
avoids taking significant inventory risk on new items by carefully testing and
monitoring their sales. The Company generally tests and monitors numerous new
styles each year. Typically, a new style is tested initially in approximately
ten stores. Successful new styles are then tested in 20 to 30 additional stores.
After further evaluation, a new style may be rolled out to a broader segment of
stores or system-wide. New styles are rolled out selectively, with attention to
test results in particular regions or in stores known to serve a higher
percentage of a certain demographic group. Each store typically carries 250 to
300 styles.
Merchandising decisions, including merchandise mix, pricing, promotions and
markdowns, are made at the Company's corporate offices. The Company's product
purchasing is coordinated through a centralized merchandising department under
the direction of its Executive Vice President--Merchandising. The merchandising
department currently consists of 19 persons, including a merchandising manager,
five buyers for the Track 'n Trail stores and two buyers for the Overland
Trading stores. The Company's Track 'n Trail and Overland Trading buyers operate
independently, allowing them to focus on their distinct customers' merchandise
preferences and lifestyles. These buyers are supported by three stock analysts
and seven assistants, who manage the Company's computerized merchandise planning
system and other systems personnel. Management also receives input from the
Company's 17 district managers regarding local or regional factors relevant to
merchandising decisions.
38
FOOTWEAR
The principal categories of footwear offered by Track 'n Trail and Overland
Trading stores, and selected vendors for each, are summarized below:
SELECTED
SELECTED OVERLAND
TRACK 'N TRADING
CATEGORY DESCRIPTION TRAIL VENDORS VENDORS
Rugged Casual Rugged footwear with technical Ecco Clarks
features designed to perform on Merrill Ecco
adverse terrain, including internal Rockport H.H. Brown
support systems, waterproof leathers Timberland Rockport
or membranes, comfort technology built Timberland
into the midsole and insole, and
technical outsoles.
Walking/Comfort Traditional walking shoes Clarks Clarks
incorporating comfort technology in Ecco Ecco
design and construction. Rockport Rockport
Joseph Seibel
Hikers Functional backpacking, lightweight Rockport Rockport
hiking and approach boots and shoes. Solomon Timberland
These products contain the technical Timberland
features and benefits necessary to Vasque
support activities ranging from heavy
backpacking to recreational day hiking
and trail running.
Work/Fashion Functional (work, field and duty) and Caterpillar Dr. Martens
fashion boots and shoes, including Dr. Martens H.H. Brown
steel toe, insulated, waterproof and Timberland Timberland
ANSI approved footwear.
Sandals Comfort footbed, sports specific, Birkenstock Birkenstock
casual and fashion sandals, as well as Born Born
clogs. Clarks Clarks
Dr. Martens Dr. Martens
Simple Rockport
Stegmann Joseph Seibel
Teva Stegmann
Teva
Sportleisure Youth-oriented and alternative Airwalk --
products designed for skateboarding, Simple
BMX biking and other "extreme" sports Vans
activities.
Lightweight Casual Lightweight footwear, including boat Born Born
shoes and opened-up casuals. Sperry Clarks
Timberland Rockport
Joseph Seibel
Sperry
Timberland
Cold Weather Seasonal products designed for foul Columbia Canada North
weather. Most products are waterproof Sorel Columbia
and temperature rated. Ugg Sorel
Ugg
39
Private label merchandise accounted for approximately 12.0% of the Company's
net sales in each of fiscal 1995 and fiscal 1996. The Company sells its private
label merchandise under names such as Forza-TM-, New Terrain-TM-, Mole-TM-,
Nordic Trail-TM- and Coloma Trail-TM-. The Company plans to begin to introduce
private label merchandise at Overland Trading stores in fiscal 1997.
ACCESSORIES
The Company also offers accessories, including socks and shoe care products
such as sprays and polishes. Some of these accessories carry the same brand
names as the shoes, boots and sandals sold by the Company, although most are
supplied by different manufacturers than the Company's footwear suppliers.
Accessories accounted for approximately 7.0% of net sales at Track 'n Trail
stores in fiscal 1996, and accounted for less than 2.0% of net sales at Overland
Trading stores for Overland's fiscal year ended August 3, 1996. The Company
intends to increase accessories sales at Overland Trading stores in fiscal 1997.
PURCHASING AND SOURCING
The Company believes that its ability to buy in large quantities directly
from suppliers helps it to plan merchandise flow effectively and to obtain
competitive pricing and trade terms. Although the Company deals with
approximately 100 vendors, a substantial portion of the Company's merchandise is
provided by a limited number of brand name suppliers. The Company's ten largest
suppliers accounted for approximately 66.8% and 68.0% of the Company's net sales
in fiscal 1995 and fiscal 1996, respectively, of which eight were the same in
each period. In fiscal 1996, Dr. Martens, Timberland and Birkenstock accounted
for 18.3%, 12.8% and 8.7% of the Company's total net sales, respectively.
The Company strives to build and maintain strong and interactive
relationships with its major suppliers. Buyers meet regularly with major vendors
to stay abreast of new product lines, new features and changes in styling
direction. The Company frequently shares information with its vendors about
market research, merchandising trends and the Company's goals. In addition, the
Company has established EDI programs with most of its major suppliers in order
to improve its inventory efficiency. The Company develops and transmits purchase
orders through its EDI links, and receives information about order status,
delivery times and pricing. These programs thus permit more rapid merchandise
replenishment and faster inventory turns. The Company believes that its
relationships with major suppliers improve its ability to obtain desired styles
and give the Company flexibility to adjust to shifting market demand for
different vendors' products from season to season. In an effort to secure
appropriate quantities of items in high demand, the Company advises its major
vendors of its forecasted needs approximately six to 12 months in advance.
However, the Company has no long-term purchase contracts or other contractual
assurances of continued supply or pricing with any of its suppliers.
Most private label products are sourced from the Far East (primarily China,
Taiwan and South Korea) and Europe (primarily Spain, Italy and Portugal). The
Company's Product Development Manager is responsible for identifying developing
styles for private label manufacture, arranging for product design and locating
manufacturers with the assistance of local agents. The Company actively seeks
advantageous sourcing opportunities and works with a variety of manufacturers.
During fiscal 1996, the Company relied on approximately 25 private label
manufacturers. Generally, private label products are delivered to the Company
approximately four to six months after initial order placement, with longer lead
times for products manufactured in the Far East. Upon order, the Company
typically posts an irrevocable letter of credit in the amount of the purchase
price. The Company has no long-term contracts with its manufacturing sources and
competes with other companies for production facilities. See "Risk
Factors--Dependence on Major Suppliers."
STORE OPERATIONS
The Company operated 128 stores as of February 22, 1997, all but three of
which were located in regional or super-regional shopping malls. Each store
typically carries 250 to 300 styles of footwear.
40
Although all stores are integrated into the Company's inventory control,
distribution and management information systems, Track 'n Trail and Overland
Trading stores differ in format and decor because of their different targeted
customer bases.
TRACK 'N TRAIL STORE FORMAT
The Track 'n Trail storefront design typically features an all glass 20- to
30-foot front, enabling customers to view featured products on display as well
as the extensive product assortment available inside the store. The edges of the
storefront are often accented with rock fixtures that are a signature element in
the Track 'n Trail design theme. Product display fixtures at several stores are
designed to represent rock formations, which may also be incorporated into
customer seating fixtures and waterfall display pieces. The store interiors
feature natural-tone walls, accent trim, furniture and fixtures. Floor coverings
are natural wood or soft earth-tone carpeting, and often include colorful murals
depicting outdoor scenes, providing an environment that is both aesthetically
pleasing and complementary to the product displays. Each style of footwear is
displayed by category, such as hiking boots or sandals. Merchandise is typically
featured on rock displays or fixtures along the walls of the stores, with
product categories indicated by an overhead sign. Track 'n Trail stores range in
size from 921 to 2,911 square feet and average approximately 1,880 square feet
in size, of which 40% to 60% is devoted to the sales floor.
OVERLAND TRADING STORE FORMAT
Overland Trading stores generally feature interiors that are well lighted,
open and inviting. Most stores have two display windows in which a
representative collection of merchandise is presented. Store furnishings are
constructed of high-quality light woods that contrast against the rich, emerald
green floor coverings. Management believes that the Overland Trading stores'
more traditional environment conveys the high quality of merchandise and service
sought by the Overland Trading concept's more mature target consumer. The
Overland Trading merchandising approach focuses on the high-quality brands
carried. Each major brand is housed as a "collection" in a distinct wall
section, which is delineated by architectural elements and by a distinctive,
back-lit overhead sign carrying the vendor's logo. For example, men's Timberland
footwear is presented as a collection within a defined wall section, with a
back-lit Timberland sign overhead. Overland Trading stores have sales floors
similar in size to those at Track 'n Trail stores, but have smaller stockrooms.
The Company plans to incorporate larger stockrooms in future Overland Trading
stores in order to minimize missed sales opportunities due to shortages of
high-demand products. Overland Trading stores average approximately 1,450 square
feet in size.
OUTLET STORES
The Company consolidates older or slow-moving merchandise to two outlet
stores for additional or final markdown. Inventory transfers are initiated by
the merchandising department and are effected directly between the retail store
and the outlet store. The Company's Track 'n Trail outlet store, opened in
August 1996, currently features a contemporary "industrial" decor, with a moving
conveyor belt carrying merchandise along the storefront's perimeter. The Company
also operates an Overland Trading outlet store. The Company is currently
evaluating the merchandising, format and interiors of its outlet stores.
STORE MANAGEMENT AND COMPENSATION
The Company's Vice President-Stores, two regional managers and 17 district
managers visit each of the Company's stores on a regular basis to review the
implementation of Company policy, monitor operations and review inventories and
the merchandise presentation. Each store has a store manager who is responsible
for supervision and overall operations, two to three assistant managers and
approximately four to eight sales associates, most of whom work part-time.
The regional, district and store managers receive fixed salaries and are
eligible for incentive bonuses, primarily based on their achievement of the
goals stated in the Company's Management by Objective
41
("MBO") program. The MBO program focuses on reviewing, managing and improving
three key objectives: net sales, selling cost and inventory shrinkage. All field
incentive compensation programs are based upon goals within these three key
objectives. To support the MBO program, the Company has developed an appraisal
system to monitor each store's performance on a monthly and quarterly basis.
Each appraisal focuses on a store's performance in a key compliance area such as
customer service, visual presentation, store operations or loss prevention, to
support performance in the three key MBO objectives. The Company also monitors
many other store-level variables from its corporate offices, including refund
levels, register variances, telephone bills and similar items.
The Company intends for store employees to focus a substantial portion of
their efforts on customer service. As a consequence, the Company has centralized
as many administrative functions as possible, including buying, development of
in-store merchandising displays, inventory allocation, human resources and
accounting functions, at its El Dorado Hills, California corporate offices.
CUSTOMER SERVICE
The Company is committed to achieving customer satisfaction and to building
a loyal customer base by providing a high level of knowledgeable, attentive and
personalized customer service. The Company believes that educating consumers
about the features and benefits of its product offerings is a critical component
of its success, and management considers its sales associates' knowledge of the
Company's customers and products to be essential to its marketing approach and
customer satisfaction.
To develop knowledgeable, responsive sales associates, the Company has
devoted significant resources to developing and implementing employee
development and incentive programs. All store employees receive extensive
training on merchandise features, benefits and technology, as well as customer
relations and selling skills. The training program focuses on "six steps" to
achieve sales and customer satisfaction: greeting the customer; assessing his or
her needs; exceeding customer expectations; overcoming objections; suggestive
selling; and closing the sale. In addition to training from the store manager,
each employee attends regional product information seminars, receives in-store
training through vendor presentations and vendor-supplied videotapes, and is
required to complete a formal, written training program. Store managers are also
required to complete a 12-week training program, during which they are
instructed in the technical aspects of footwear, management skills and employee
relations. To provide managers with hands-on training, new store and district
managers are typically required to work alongside individuals in comparable
positions for two to three weeks before they are asked to perform their duties
without direct supervision. Managers also attend a minimum of three management
training meetings per year. Supplemental product information bulletins are
distributed frequently from the Company's corporate offices to educate store
managers and sales associates about new products as they are introduced. The
Company also employs an independent agency to send unidentified "mystery
shoppers" to Company stores, and to report on the service provided to these
shoppers by store personnel. The Company also monitors the level of customer
service on an ongoing basis through various initiatives, such as customer
comment forms and telephone surveys. The Company is implementing the foregoing
employee development and incentive programs and customer service initiatives at
its Overland Trading stores, and has undertaken a review of all of the policies
and procedures for Overland Trading store operations.
STORE LOCATIONS
The Company considers its ability to obtain attractive, high-traffic store
locations to be a critical element of its business and a key factor in the
Company's future growth and profitability. In determining new store locations,
the Company considers regional and local economic conditions and household
income data, mall locations, site locations within the mall, vacancy rates,
sales per square foot, "anchor" tenant stores, tenant mix, consumer traffic,
competition and occupancy, construction and other costs associated with opening
a store. Site selection and lease negotiation are supervised by the Company's
Vice President-Real Estate and senior management.
42
The Company operated 128 stores in 23 states as of February 22, 1997, and
has signed leases for an additional four stores, as set forth in the following
table.
TRACK 'N TRAIL STORES
CURRENT PLANNED
STATE STORES OPENINGS(1)
- ------------------------------- ------------- -----------------
Alaska......................... 2
California..................... 26
Colorado....................... 6
Connecticut.................... 1
Idaho.......................... 1
Illinois....................... 6 2
Indiana........................ 5
Maine.......................... 1
Maryland....................... 1
Massachusetts.................. 3
Michigan....................... 10
CURRENT PLANNED
STATE STORES OPENINGS(1)
- ------------------------------- ------------- -----------------
Minnesota...................... 2
Nevada......................... 1
New Hampshire.................. 1
New York....................... 7
Ohio........................... 3 1
Oregon......................... 3
Pennsylvania................... 3
Tennessee...................... 1
Virginia....................... 1
Washington..................... 7
Wisconsin...................... 3
OVERLAND TRADING STORES
CURRENT PLANNED
STATE STORES OPENINGS(1)
- ------------------------------- ------------- -----------------
Connecticut.................... 2
Massachusetts.................. 9
New Jersey..................... 4
New York....................... 10
CURRENT PLANNED
STATE STORES OPENINGS(1)
- ------------------------------- ------------- -----------------
Ohio........................... 4 1
Pennsylvania................... 2
Virginia....................... 3
(1) Stores for which leases have been signed but which had not commenced
commercial operations as of February 22, 1997.
The Company leases all of its stores. Initial lease terms of the Company's
stores generally range from eight to ten years in duration without renewal
options, ten-year leases being the most common. The leases generally provide for
a fixed minimum rental plus a percentage of store sales in excess of a specified
amount.
MARKETING
The Company's policy is to price its merchandise competitively with
department stores and specialty footwear retailers in the particular mall in
which each Company store is located. The Company is primarily a full-price
retailer, selling most merchandise at full retail prices. However, the Company
conducts promotions that generally revolve around themes such as back-to-school,
and holiday seasons. In addition, the Company promotes individual items as
needed and consolidates seasonal and slow-moving merchandise into selected
mall-based stores prior to consolidation into its two outlet format stores for
liquidation.
The Company relies primarily on mall traffic and the visual appeal of its
stores to attract customers, and on the breadth of its product offering and the
quality of its customer service to retain them. In-store promotions with
point-of-purchase materials are also an important part of the Company's
marketing strategy. The Company also takes advantage of advertising and
promotional assistance from many of its suppliers, which takes the form of
cooperative advertising programs, point-of-purchase materials, product training
for employees and other programs. The Company spends very little on advertising,
primarily contributing to mall merchant association funds which will advertise
both the mall and individual stores within the mall.
43
DISTRIBUTION
The Company believes that strong distribution support for its stores is a
critical element in its strategy to maintain a low cost operating structure and
to expand in the future. The Company leases a single 24,192 square foot
distribution center in El Dorado Hills, California and manages the distribution
process centrally from its corporate offices located at the same site. The
Company also leases a 6,000 square foot staging facility in Rancho Cordova,
California. The Company receives approximately 85.0% of its merchandise at its
central distribution center, of which approximately two-thirds is distributed to
Track 'n Trail stores and one-third is distributed to the Overland Trading
stores. Other merchandise is drop-shipped from vendors directly to individual
stores. The Overland Trading stores currently receive a higher proportion of
drop-shipped merchandise than the Track 'n Trail stores. The Company intends to
process an increasing percentage of Overland Trading merchandise through its
central distribution center, as it expands the stockroom capacity of future
Overland Trading stores.
The central distribution center is operated primarily as a "cross-docking"
facility rather than as a warehouse. The Company attempts to retain minimal
inventory at this facility, although it will occasionally back-stock high-demand
items that are expected to be in short supply and inventory for peak seasonal
needs. The central distribution center has multi-access docks, enabling the
Company to receive and ship simultaneously and to pack separate trailers for
shipments to different regions of the country at the same time. The facility
includes conveyor systems designed to reduce labor costs, increase efficiency in
processing merchandise and enhance space productivity.
Upon receipt at the central distribution center, merchandise is inspected,
recorded in the Company's MIS system, allocated to stores by the system's
automatic replenishment function, price tagged and repackaged for distribution
(to the extent it was not prepared and pre-ticketed by the vendor according to
individual store). Merchandise is typically shipped via common carrier from the
central distribution center to the various stores once a week, or as needed
during peak seasonal periods.
The Company believes that its current central distribution facility will
support as many as 160 stores, which the Company believes is sufficient to
continue to service existing stores and to accommodate anticipated growth
through mid-1998. The current corporate facility's lease expires in March 1998.
The Company presently anticipates moving its distribution facility and corporate
offices to a larger, leased "build-to-suit" facility in 1998, which is expected
to have 60,000 square feet of distribution facility space initially, and could
accommodate at least 500 stores if expanded to its anticipated full capacity of
100,000 square feet.
MANAGEMENT INFORMATION SYSTEMS
The Company has a computerized management information system that includes a
network of terminals at the corporate offices to support management decision
making, along with PC-based POS computers at the stores that are connected via
modem to the computers at the corporate offices. Each store's POS system
accumulates detailed sales transaction data that is polled by the Company's main
system nightly and reviewed by management each day. The system's perpetual
inventory feature enables the Company's buyers to review and analyze daily the
inventory levels at each individual store by department, class and SKU in order
to replenish fast-selling items on a timely basis. The system also includes an
automated replenishment system for core products that orders replacement stock
of such products based on factors such as current sales trends or store
inventory levels. The minimal inventory that is maintained at the Company's
central distribution center is also managed through daily inventory management
reports. During fiscal 1996, the Company upgraded the computer hardware at its
corporate offices to accommodate its presently anticipated growth. The Company
completed the integration of the Overland Trading stores into its management
information system in January 1997.
COMPETITION
The business in which the Company is engaged is highly competitive. Most of
the items sold by the Company are sold by department stores, outdoor and
sporting goods stores, athletic footwear stores and
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traditional shoe stores. Some of these stores are owned or franchised by major
suppliers of the Company. Many of the stores with which the Company competes are
units of large national and regional chains that have substantially greater
financial and other resources than the Company. To a lesser extent, the Company
competes with mail order retailers. In many cases, the Company's stores are
located in shopping malls in which one or more of its competitors also has a
store.
The Company believes that it has been able to compete favorably with its
competitors by operating attractive, well-stocked stores in high retail traffic
areas, offering competitive prices and providing knowledgeable and courteous
customer service. The Company seeks to provide competitive pricing by
effectively mixing high profile, brand name merchandise with private label
merchandise and opportunistic purchases of other brand name merchandise, and by
controlling both store and administrative expenses.
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