Footstar, Incorporated

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Footstar, Incorporated

933 MacArthur Blvd.
Mahwah, New Jersey 07430
U.S.A.
(201) 934-2000
Fax: (201) 934-0398
Web site:http://www.footaction.com

Public Company
Incorporated: 1996
Employees: 15,200
Sales: $1.79 billion (1997)
Stock Exchanges: New York
Ticker Symbol: FTS

SICs: 5661 Shoe Stores, Retail; 6719 Holding Companies, Not Elsewhere Classified; 5699 Miscellaneous Apparel & Accessory Stores

Footstar, Incorporated is a holding company whose two subsidiaries, Footaction and Meldisco, are leading shoe retailers of their types. Since Footstar was created as a spinoff of the Melville Corporation in 1996, Footaction, a mall-based chain of over 550 athletic shoe stores, has shown strong sales growth, with significant numbers of new stores added each year. Meldisco, operator of over 2,500 discount shoe outlets, primarily in leased space in Kmart stores, has been the backbone of Footstar’s business, generating about twice the annual revenue of Footaction, though growth has been slower. Together, these chains cover much of the spectrum of the retail shoe market, which tends to favor either the low or high ends of the price range. Having combined distribution operations since the spin-off, and with plans to acquire a third, complementary shoe retailer, Footstar appears likely to maintain its position as one of the largest shoe retailing companies in the United States.

Roots Date to 1893

Footstar’s history could be said to begin in 1893, with the founding in New Jersey of the Melville Corporation, a shoe manufacturer. In 1922, the Thorn Me An chain of stores was purchased by Melville, becoming the company’s first retail division. The year 1952 saw the acquisition of another shoe retailer, Miles Shoes. In 1960, Miles established a division called Meldisco, whose name was a contraction of “Melville Discount Corporation.” Meldisco did not have its own stores, but rather leased space to sell its shoes in department or other large stores. Its first Kmart-based outlet, in Greenville, North Carolina, was opened a year later, and in 1962 Meldisco signed an agreement to act as Kmart’s exclusive shoe retailer. Years of steady growth followed, as both Meldisco and the Michigan-based Kmart expanded. By the early 1980s, Meldisco had become one of the largest shoe retailers in the United States, with annual sales topping the $1 billion mark in 1985. Over 95 percent of Meldisco’s outlets were located in Kmart stores, though a few were in grocery stores and drugstores. Meldisco also had a scattering of locations overseas, from Mexico and Puerto Rico to Czechoslovakia and Hungary.

The Melville Corporation started another chain of shoe stores in the 1980s called FanClub. This operation was geared more toward younger customers looking for athletic shoes, in line with the exploding sales of that segment of the shoe market at the time. In 1991, Melville purchased a privately owned Dallas, Texas-based chain of 128 athletic shoe stores called Footaction, and converted the 129 FanClub stores into Footaction stores, creating the third largest chain of athletic shoe specialty stores in the nation. Melville, which had largely become a conglomerate of retail chains by this time (it had stopped manufacturing shoes in the mid-1980s), now had three large shoe store chains in Thorn McAn, Footaction, and Meldisco. The company also owned about a dozen other retail chains, including CVS drugstores, Kay-Bee Toys, Chess King men’s apparel stores, and Linens ’N Things home furnishings.

Melville’s new acquisition, Footaction, had been founded in 1976 by Charles Cristol. Cristol, then 57 years old, had been a World War II Air Force pilot and later worked in a variety of jobs, ultimately spending over 20 years in various positions related to the shoe business. He had risen to the level of president of a western-style clothing company by the mid-1970s, but Cristol sensed the possibilities for retailing athletic shoes, and decided to strike out on his own. With several partners he opened a store in Wichita Falls, Texas, called Footaction. Cristol initially gave his business the corporate name of Webmit, which stood for “We Better Make It,” but it was later changed to Footaction when it appeared that they had indeed “made it.” Cristol’s goal from the beginning was expansion, and over the next 15 years he added locations in 17 states, primarily in shopping malls. A related chain of stores, Footaction for Kids, was also started. These were typically located adjacent to existing Footaction locations, enabling the company to use stockroom space and some personnel for both stores. By 1990, Footaction had opened its 100th store, and annual sales were estimated at over $50 million. That year, the company also bought Marvin’s Sports City, a Baltimore, Maryland-based chain of nine sporting goods stores. The following year, when Footaction was sold to Melville, founder Cristol stepped down as CEO and was replaced by Chief Operating Officer Ralph T. Parks.

The Early 1990s: Tough Times for Thorn McAn

Though Melville Corporation’s Thorn McAn business had had a long and successful history, and had achieved the coveted position of becoming a household name, its sales had begun declining by the early 1980s. Its reliance on its own shoes, rather than those of well-advertised, trendy brandnames, was one reason, as was the shifting marketplace, which had moved away from McAn’s more conservatively styled, low- to mid-priced shoes. Tennis or athletic shoes had broken fashion barriers and were now much more acceptable wear off the court or field, and the wild success of several lines of athletic shoes, particularly those of Nike, left the “old-fashioned” shoes of McAn hurting. In the early 1980s the chain had over 1,100 stores, but the numbers were shrinking, with a particularly large drop coming in late 1992 when Melville announced the closing of 350 of the 740 remaining McAn outlets, some being shuttered and a few converted to other Melville Corp. stores. Within the next several years McAn continued to falter, and additional stores were closed. The early-to-mid-1990s was in fact a tough period for all discount shoe retailers, with an estimated 1,500 such stores closing during 1995.

Over the years, Melville Corporation had evolved from a manufacturer into a conglomerate of unrelated retail operations. By the mid-1990s, however, many corporations were refocusing on single areas of business and getting rid of distractions and sidelines. In this climate, Melville, which had originally been a shoe company, decided to concentrate on its chain of CVS drug stores, announcing in the fall of 1995 that it would sell off its other retailing operations. The Kay-Bee Toys chain and the shoe companies would be first, with an apparel chain called Bob’s and the Linens’n Things house wares stores coming last. After it had completed selling off these subsidiaries, the corporate name would be changed to CVS.

1996: Footstar Created

When Melville decided to divest itself of its shoe retailing operations, a long, hard look was taken at Thorn McAn, and it was decided that there was little hope for turning around the steady decline which the company had suffered. Less than 300 stores were left, and many of these were only marginally profitable. It was decided that most of the McAn stores would be closed; those that had viable locations would be converted into Footaction outlets. Over the next several years close to 100 conversions were planned. The newly named Footstar, Incorporated would thus solely consist of the Meldisco and Footaction shoe businesses. The new CEO, chairman, and president of Footstar was J. M. “Mickey” Robinson, who had previously held those positions with Meldisco. Stock was offered on the New York Stock Exchange in October 1996. At this time Footaction consisted of 444 stores, and was the third largest athletic shoe specialty chain, behind Foot Locker and Athlete’s Foot. Annual sales were reported at $423 million. Meldisco had over 2,100 leased outlets in Kmart stores, with a few additional ones in other locations. Its annual sales were $1.2 billion in 1995. The two companies combined employed some 12,600 persons.

Company Perspectives

From toddlers to teenagers, construction workers to working moms, Footstar fits! Through our two businesses —Footaction and Meldisco —we deliver footwear fashion, quality and value to people in all walks of life, every day.

The business of selling shoes, as with many other things, had been changing a great deal by the 1990s, and Footaction and Meldisco both responded to the challenge to keep up with the times. Footaction had begun converting some of its locations into larger, more inviting “Superstores” in 1993. These outlets, some newly opened and some expansions, were two to five times larger than the 2,200 square feet of the company’s average store. There was a wall of video screens and a “walk of fame” with bronze stars embedded in the floor featuring the names of prominent athletes who were associated with its shoes, such as Shaquille O’ Neill and Michael Jordan. The idea was to make the store a fun place to go for the target audience of 12- to 24-year-old, largely male shoppers. Products, were also redisplayed together in ways that improved the sales of accessories. In the industry this was known as a “hookup,” for example selling a customer a pair of shoes, a t-shirt, a baseball cap and a warm-up suit all with the Nike “swoosh” logo for a package price. Footaction had been selling these accessory items along with its shoes for years, but sales had always been unremarkable. The company also worked with vendors to ensure that it had exclusive versions of their products to feature. This might involve getting Reebok or Adidas to create a special edition of a particular line of shoes, with colors or details only available on the shoes found at Footaction. These “Exclusives” constituted up to half of all sales. Other methods of attracting business included advertising campaigns which strongly stressed the identity of the Footaction chain, rather than the specific products it carried, and a magazine-cum-catalog launched in 1997 which featured interviews with athletes and information about products. This was mailed out to customers who had signed up for a preferred-customer “Star Card.” Data taken when the cards were issued enabled the company to compile a detailed database about its customers. Footaction also started a web site, www.footaction.com, designed to appeal to its target audience. The chain had been involved since 1993 in sponsoring a competition called the “NFL Quarterback Challenge,” for high school seniors, which culminated in a championship match at a professional sports facility. National Football League quarterbacks made personal appearances in cities where the competitions were held, and the final matches received national television coverage.

For Meldisco, the response to the changing retail environment was largely under the control of Kmart. That company’s market share had been slipping for some time, and in the early 1990s it was forced to close a number of stores. In an effort to reverse this slide, Kmart inaugurated its Big K concept. This entailed offering more “branded” merchandise, and, later, placing a special emphasis on products that shoppers needed to buy on a frequent basis, such as household cleaning products and paper goods. The stores were also redesigned, and relative placement of the different departments was shifted. Meldisco’s Shoemart outlets, as they were officially known in Kmart stores, were given a higher-traffic spot near men’s and ladies’ apparel. With its early test sites showing significant sales improvements, Kmart Corporation announced plans to upgrade all its stores by the end of the year 2000. Meldisco also introduced several new lines of shoes in association with its vendors, such as the Cobbie Cuddlers line from NineWest, which contributed to increased sales.

Continuing to Move Forward in the Late 1990s

Footstar’s first year following its stock offering was a profitable one, with sales of more than $1.6 billion, an increase of 3.5 percent over the previous year. Meldisco’s improving fortunes with Kmart, and Footaction’s growing sales and aggressive expansion, kept the company in the black—in fact it had no long-term debt whatsoever. By the end of this first year 35 new Footaction stores were open, some of which were conversions of Thorn McAn locations, with a number of other stores expanded to Superstore size. The company had now enjoyed 30 consecutive months of same-store sales increases. Footaction’s success, however, was largely tied to that of shoe giant Nike, which had shown phenomenal annual growth for several years running. In the spring of 1997, reports from both Nike and Footstar that athletic shoe sales were leveling off caused a brief investor panic, with the company’s stock plunging by over 25 percent. Fortunately, this had no lasting impact, as Footstar had already begun planning to cut costs, and was soon announcing the imminent consolidation of Footaction and Meldisco distribution operations, with a similar consolidation of accounting activities to follow. In November 1997, Meldisco stores began selling a new line of shoes with a familiar brand name—Thorn McAn. Footstar had retained the name and now successfully played on its history and recognition value.

The end of 1997 saw further gains, as Footaction stores had grown in number to 550, with a total of 669 anticipated by the turn of the century. Meldisco now had over 2,500 outlets, and was seeing modest sales growth, compared to the slight decline of the previous year, as Kmart’s turnaround continued to bring business back to the chain. In early 1998, Footstar announced that it was planning on finding a third shoe store format by year’s end, with acquisition or internal development both under consideration. In March, a consulting firm was retained to help with the process.

As it approached the end of the 1990s, Footstar was on solid ground, with its backbone business of Meldisco rebounding due to the improved fortunes of Kmart Corporation. Meldisco’s sales accounted for 16 percent of the United States discount shoe market. Footaction, the third largest specialty athletic shoe chain in the country, was continuing to grow, both in sales and in the expanding number of store locations. Footstar’s plans to add a third shoe business met with the approval of industry analysts, who observed that such an operation would be able to take advantage of the corporation’s infrastructure and its strong relationships with key vendors. Selling a product that was always in demand also seemed to be a basic part of Footstar’s success.