Shoe Pavilion, Inc.

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Shoe Pavilion, Inc.

13245 Riverside Drive, Suite 450
Sherman Oaks, California 91423
U.S.A.
Telephone: (818) 907-9975
Fax: (818) 907-9936
Web site: http://www.shoepavilion.com

Public Company
Incorporated: 1979
Employees: 672
Sales: $102.5 million (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: SHOE
NAIC: 448210 Shoe Stores

Shoe Pavilion, Inc., is a Sherman Oaks, California-based discount shoe retailer operating some 100 stores in California, Oregon, Washington, Nevada, Arizona, New Mexico, and Texas. The company also sells shoes, socks, handbags, wallets, hats, and shoe care accessories on its Web site. The chain concentrates on designer label and name brand women's, men's, and children's footwear, including such brands as Ralph Lauren, Kenneth Cole, Steve Madden, Nine West, Converse, Timberland, Rockport, Reebok, and Adidas. Discounts range from 20 to 60 percent off department store prices. Merchandise comes from more than 100 vendors, the result of manufacturer's overruns, direct purchases from factories in China and Italy, or acquisitions during off-peak production periods. Almost 60 percent of the company's business comes from the sale of women's shoes, 30 percent from men's footwear, 7 percent from children's goods, and 6 percent from accessories. Shoe Pavilion stores are generally located in strip malls and outlet centers, employing a warehouse, self-service-style format. Shoe Pavilion is a public company listed on the NASDAQ under the SHOE ticker symbol; about one-third of the shares are held by its founder and chief executive Dmitry Beinus.

FOUNDER EMIGRATES TO AMERICA: 1976

Born in the Soviet Union, Beinus received a master's degree in meteorology from the University of Leningrad. With the borders beginning to loosen, he was able to secure immigration to the United States, arriving in Seattle in 1976. Unable to find work in his chosen field and limited in his ability to speak English he was forced to take a job as a stock boy at $2.25 an hour in the women's shoe department in a Nordstrom department store in downtown Seattle. Just three days after he began, Beinus was asked to step in as a salesman and he proved to be a natural. Four months later he emerged as Nordstrom's leading shoe salesman, despite having no particular interest in shoes. "I was selling shoes not because I wanted to, but because I had to," he explained to the Puget Sound Business Journal. He continued, "But I'm a very aggressive guy. Selling is easy for me to do."

His aggressive nature also prompted Beinus to conclude that if he was successful selling shoes for Nordstrom he could do the same thing for himself. Looking to strike out on his own, he regularly scoured the newspaper for business opportunities and one day in 1979 came upon an ad for a small shoe store at the Renton Center in Renton, Washington, called Shoe Inn that was on the market for $50,000, inventory included. To raise the necessary $10,000 down payment he refinanced his house, and soon began life as a small businessman. The 500-square-foot Shoe Inn was not a discount operation, and Beinus struggled to make a go of it. "It would have been easier to work at Nordstrom," he quipped to the Puget Sound Business Journal. Along with his wife he worked from nine in the morning to nine at night. In the first year the shop barely broke even, generating sales of about $250,000. The following year business improved to $370,000, and in the third year sales approached $600,000.

Beinus opened a second full-price store, but neither of his stores performed as well as he had hoped. Then, in 1982, he began to pursue an "off-price" strategy when a Marshalls discount department store opened in the area. To take advantage of the traffic generated by the new Marshalls, he opened a discount shoe store in the Pavilion Mall under the name Shoe Pavilion. Beinus continued to operate Shoe Inn, and the new venture essentially served as a clearance outlet for the full-price wares at the original store. The new store did well, prompting Beinus to open another Shoe Pavilion next to a Ross department store, to again take advantage of the traffic created by larger competitors. In 1983 Beinus incorporated his growing business as Shoe Inn, Inc., but it was the Shoe Pavilion concept that became his focus. Using cash flow from the stores he was able to open several more Shoe Pavilion units in the Puget Sound market, and with added size he gained buying power with shoe manufacturers. Moreover, shoe factories in China and Brazil began making their wares available in the 1980s. With more discount merchandise to offer, the burgeoning Shoe Pavilion chain was able to increase sales at an even faster clip. "I was able to buy better and cheaper—and the cheaper you sell, the faster you sell," Beinus told the Puget Sound Business Journal. While there were other discount shoe stores, what distinguished Shoe Pavilion was its high-end merchandise, which offered the added benefit of providing greater profits. In order to avoid antagonizing the major department stores that carried many of the same products and risk losing his sources, Beinus shied away from touting specific brands in his advertising. Nevertheless, the customers knew what Shoe Pavilion had to offer, so word spread, and the chain prospered.

By 1990 the Shoe Pavilion chain numbered 11 stores in Puget Sound. Beinus now set his sights to the south and the Bay area of San Francisco. In October of 1990 a Shoe Pavilion store opened in Sunnyvale, and a location in San Ramon soon followed. The chain then entered San Francisco proper, opening a store close to a downtown Nordstrom in May 1991.

SELF-SERVICE INTRODUCED: 1993

Shoe Pavilion employed a traditional retail format until late 1993 when a self-service format was introduced. Most of the stores were converted in 1994. The chain lost revenue because stores had to be temporarily shut down and it incurred some extra expense as a result, but in the long run, the switch to self-service paid off. Revenues totaled $21.5 million in 1994; by comparison, at the height of the conversion effort the company lost $327,000. It was also in 1994 that Shoe Pavilion installed a remote computer-based video monitoring system, a key element in the company's ability to make the self-service format viable. Now, personnel at company headquarters could keep watch on the retail floor as well as the backdoor, where a camera was programmed to transmit video whenever the door was opened. Coupled with electronic security tagging of the merchandise, the chain was able to significant reduce shrinkage—the loss of products due to theft—whether by shoplifters or employees.

Sales improved to $25.5 million in 1995 and the company returned to profitability, netting $402,000. After opening seven new stores in 1993 and another nine stores in 1994, Shoe Pavilion opened six new stores in 1995, but also began to close some older locations that did not perform as well as the company had expected. At the start of 1996 the chain totaled 38 units, a number that increased to 41 by the end of the year, the result of nine new store openings and six closures. Revenues also improved to $30.3 million while net income improved to $922,000.

COMPANY PERSPECTIVES

Shoe Pavilion is the leading retailer of off-price designer and name brand shoes for men and women.

Shoe Pavilion relocated its headquarters from Washington State to northern California in early 1997, a preliminary step for entering the Los Angeles market a short time later, a move accomplished through the acquisition of a small independent chain called Standard Shoes. Nine of the new stores took the name Shoe Pavilions Designer Shoe Warehouse. All told, the company added 16 stores and closed two in 1997, so that by the end of the year Shoe Pavilion was operating 55 stores in Washington, Oregon, California, and Nevada. They combined to generate sales of more than $45 million, resulting in a net profit of $2.3 million.

Beinus formed a holding company, Shoe Pavilion, Inc., in November 1997, then in February 1998 took the company public at $7 a share in an initial public offering of stock underwritten by the San Francisco firm of Van Kasper & Company. The proceeds were used to open 15 new stores. Four units were added in northern California, two in Oregon, and one in Washington, but most of the attention was paid to Southern California when nine new stores opened in the Los Angeles and San Diego markets. The Nevada store was also closed when its lease expired in 1998. In addition, Shoe Pavilion spent money to begin upgrading its information systems. With 69 units, Shoe Pavilion was able to increase its buying power, leading to higher earnings. For the year, the company tallied $56 million in sales and net income of nearly $2.8 million.

GORDMANS SHOE DEPARTMENTS ADDED: 1999

As 1998 came to a close, Shoe Pavilion began doing business on the Internet, operating through Yahoo! Shopping, which combined more than 2,700 online stores. Also in December, Shoe Pavilion doubled its credit line to $15 million, courtesy of Wells Fargo Bank, and was prepared for further expansion in the final year of the decade. Early in 1999 the company more than doubled the size of its Richmond, California, distribution facility to 92,000 square feet. While Shoe Pavilion opened nine new stores over the course of the year, the most significant development was the agreement it reached with the Gordmans discount department store chain to operate the shoe departments in 33 stores located in Colorado, Illinois, Iowa, Kansas, Missouri, Nebraska, Oklahoma, and South Dakota. As a result, the Shoe Pavilion chain grew to 111 units and expanded from three states to 11, giving the company a presence in many new markets. The Gordmans departments were up and running before the all-important holiday season, having a significant impact on the balance sheet. Revenues improved to $71.6 million, and the company posted net income of $2 million.

In 2000 the company added three more Gordmans' shoe departments, as well as a pair of Shoe Pavilion stores. A year later two more Gordmans operations were opened, eight new Pavilion Shoe stores were added, and five underperforming stores were closed. A year later three more stores were closed while eight new ones were opened, bringing the number of total units to 121. Sales topped $91 million in 2000, but despite the addition of five stores, a flagging economy in 2001 hindered business, resulting in a dip in revenues to $88.1 million.

As part of an effort to control costs, Shoe Pavilion closed its Richmond warehouse at the end of February 2002, turning over distribution to a third party. In addition, the company moved its corporate offices out of the Richmond facility. Shoe Pavilion opened an online store in 2002. Another significant move was the decision to sever ties with Gordmans when the license agreement expired in June 2002, at which point the 40 shoe departments closed. The action was taken, according to Shoe Pavilion, because Gordmans reneged on their agreement. To back that contention, Shoe Pavilion sued Gordmans, seeking $858,000 because of violations to the license agreement. The loss of this business contributed to a continued drop in revenues, which fell below $84 million in 2002. The company also barely broke even, posting net income of just $147,000.

KEY DATES

1979:: Dmitry Beinus acquires Shoe Inn in Seattle.
1982:: First Shoe Pavilion store opens.
1993:: Company shifts to a self-service format.
1997:: Los Angeles-based Standard Shoes chain is acquired.
1998:: An initial public offering is completed.
2002:: Licensing agreement is made with Gordmans Department Stores.
2005:: Headquarters moves to Sherman Oaks, California.

The slide continued for Shoe Pavilion in 2003. While the chain added four new stores, it also closed seven units, reducing the total number of units to 85 by the end of the year. Revenues dipped slightly to $83.6 million, but the balance sheet showed red numbers, as the company reported a net loss of $2.7 million. Shoe Pavilion rebounded in 2004, due primarily to increases in the women's shoe category and the addition of some accessories to the product mix. Sales increased to $86 million and earnings topped the $2 million mark. In 2005 the chain added four units (opening ten and closing six), bringing the total number of units to 90. The new stores, plus a significant jump in same store sales, resulted in a surge in revenues to $102.5 million and earnings of $2.6 million. Going forward, however, the chain expected to grow revenues through the opening of new stores, rather than relying on major increases in same-store sales. Moreover, the new stores were much larger than older stores, around 14,000 square feet in size compared to 8,500 square feet.

Late in 2005 Shoe Pavilion moved its headquarters to southern California, to Sherman Oaks. The chain began moving into new markets in 2006, opening a store in New Mexico as well as eight units in Texas. According to Los Angeles Business Journal, Dallas was a major test for the company because it was here that it would have to face off against a top competitor, DSW Inc., fast growing and already twice as large: "The trick for Shoe Pavilion is to weather the expansion of DSW, which went public last year, as well as an onslaught of new entrants leaping at the chance to siphon off customers in a lucrative niche."

Ed Dinger