GSI Commerce, Inc.

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GSI Commerce, Inc.

1075 1st Avenue
King of Prussia, Pennsylvania 19406
U.S.A.
Telephone: (610) 265-3229
Fax: (610) 491-7366
Web site: http://www.gsicommerce.com

Public Company
Incorporated: 1997 as Global Sports, Inc.
Employees: 1,074
Sales: $241.91 million (2003)
Stock Exchanges: NASDAQ
Ticker Symbol: GSIC
NAIC: 541512 Computer Systems Design Services

GSI Commerce, Inc. helps other companies conduct business on the Internet, providing a comprehensive set of e-commerce services to retailers, branded manufacturers, media companies, and professional sports organizations. GSI assumes responsibility for web site design and maintenance, merchandise procurement and fulfillment, and customer service matters. The company operates a 450,000-square-foot warehouse in Louisville, Kentucky, and a customer service center in Melbourne, Florida. GSI's clients include The Athlete's Foot, Kmart, Ace Hardware, the Web store for cable television channel Comedy Central, the National Football League's Denver Broncos, and The Sports Authority, among others. The company serves nearly 50 customers who pay GSI a percentage of each sale made online.

Origins

GSI lived two distinctly different corporate lives in its business history. The thread connecting the disparate periods of the company's existence was Michael G. Rubin, a Villanova University dropout whose creation of a successful e-commerce business model turned a teenage entrepreneur into the leader of a potentially $1 billion-in-sales company. Rubin's withdrawal from Villanova was not because of a lack of drive on his part—the last characteristic anyone could impugn on the enterprising teenager. While in high school, Rubin owned and operated a chain of five retail stores selling skiing and sporting goods in Pennsylvania and New York. It was his early business success that precluded Rubin from finishing his studies at Villanova. The Lafayette, Pennsylvania native started a discount sporting goods distribution business named KPR Sports International, Inc. at age 19, founding the company in 1991. The success of KPR enabled Rubin to introduce his own line of footwear in 1994, a line branded under the name Yukon.

While Rubin raced forward in the business world, another member of the sporting goods industry floundered. Its failure gave Rubin the opportunity to advance his remarkable career. In Portland, Oregon, a company that designed, marketed, and distributed a line of footwear design for women was in trouble. The company and the line of branded footwear shared the name RYKA. RYKA, Inc. was organized in 1986, introducing its first two styles of high-performance athletic footwear in 1987. The company shipped its first products in 1988. The company lost money perennially, but in the mid-1990s salvation appeared imminent. In January 1995, RYKA and L.A. Gear, Inc., a sports apparel company, announced a merger, a union that promised to alleviate RYKA's financial burdens considerably. At the end of April 1995, however, the company was notified that L.A. Gear was terminating the merger agreement. Less than three weeks later, RYKA's position became precarious when it received notice of another terminated agreement. Pro-Specs America Corporation, which provided the principal source of financing for RYKA's production activities, announced that it was ending its support in May 1995. RYKA reeled from the effect of the two termination notices. Employees were fired, employees quit, and sales efforts were cut back drastically after the company was unable to obtain products from overseas production sources.

RYKA's situation was desperate by mid-1995. The company had posted annual losses every year since its inception, racking up a deficit of nearly $18 million. Sales, which had steadily increased from $7.9 million in 1991 to $16.2 million in 1994, plummeted to $7.6 million in 1995, a year in which the company posted a $3.6 million loss. The company teetered on the edge of bankruptcy, but its collapse was staved off when MR Acquisitions, L.L.C. intervened in July 1995. The "MR" in MR Acquisitions stood for Michael Rubin. The company, indirectly owned by Rubin, gave RYKA its financial salvation, providing the company with an $8 million financing agreement. "Without this financing arrangement," RYKA's filing with the Securities and Exchange Commission explained, "management believed there was substantial doubt that the company would be able to remain in business." Rubin, as a result of the deal, gained a 40 percent stake in RYKA and, because RYKA was listed on the NASDAQ, he became chairman and chief executive officer of a publicly traded company at age 23.

Contemplating E-Commerce in 1998

Although RYKA was in dire shape when he took control, Rubin eventually was able to effect a turnaround. In 1997, he combined RYKA with KPR, forming Global Sports, Inc. as the entity with control over the RYKA and Yukon brand names. Global Sports led a profitable existence as a distributor of discount footwear, apparel, and sporting goods, but both Rubin and the company were destined for success in a different line of business. Rubin made the decision to forsake his involvement in the sporting goods business only a year after forming Global Sports, initiating a thorough transformation of the company that would take nearly two years to complete. Rubin decided to enter the e-commerce sector, a young, emerging industry with growth projections capable of seducing any ambitious businessperson. E-commerce sales in 1998 were $13 billion. Within five years, according to industry pundits, e-commerce sales were expected to reach $3.2 trillion.

The first evidence of the new Global Sports Rubin envisioned emerged in the first half of 1999. A new e-commerce division was formed called Global Sports Interactive whose mission was to build, maintain, and update web sites for sporting goods retailers. Rubin set up the division to perform nearly every task associated with a retailer's online business. Global Sports Interactive purchased merchandise directly from vendors, shipped the products, and handled all sales and customer service details. Rubin offered a complete outsourcing of Internet business for retailers, many of whom lacked the personnel, finances, and expertise to develop their own in-house departments.

Global Sports Interactive rose to the forefront of Rubin's business focus as the sporting goods footwear and apparel business receded. The web sites of the company's first four clients launched in November 1999, when Global Sports took control of the online business of Grand Rapids, Michigan-based MC Sports, La Canada, California-based Sport Chalet, Ft. Lauderdale, Florida-based The Sports Authority, and Kennesaw, Georgia-based The Athlete's Foot. By the end of the year, Rubin had divested the company's historical business, selling the Yukon and RYKA brands to a California-based company named American Sporting Goods.

Global Sports' first four clients represented the beginning of a wave of customers. As new clients signed on for the company's comprehensive services, Rubin realized he had erred in outsourcing the fulfillment services he offered. It was one of the few mistakes he made in launching his e-commerce business. Rubin could not offer adequate service by relying on third-party companies to warehouse merchandise, so, within nine months of starting the venture, he opened Global Sports' own 300,000-square-foot warehouse in Louisville, Kentucky. The addition of the warehouse left virtually everything Internet-related in Global Sports' hands, an acceptance of responsibility that appealed to retailers. The company's agreement with The Athlete's Foot typified what the relationship between Rubin's company and its customers entailed. Global Sports designed the retailer's web site, bought the inventory, stored the merchandise, shipped the products to customers, and fielded customer service phone calls. The Athlete's Foot limited its involvement to marketing the web site, establishing online prices, and advising on design to ensure the web site reflected its image. For his services, Rubin charged a percentage of sales instead of a flat fee. With each product sold online, Global Sports received 92.5 percent of the sale and The Athlete's Foot received 7.5 percent.

Moving Beyond Sporting Goods in 2001

Rubin's business model showed potential for retailers outside the sporting goods industry not long after it was introduced. In March 2000, the company's newest client was the $40 billion-in-sales retailer Kmart, a company with sporting goods sales that eclipsed $2 billion. The agreement signed in March gave Global Sports control over the merchandise procurement and fulfillment for BlueLightSports.com, Kmart's online sporting goods department that served as prelude for BlueLight.com, Kmart's full-fledged online offering. In September 2001, Global Sports moved beyond its niche in sporting goods and sports-related e-commerce by taking control over BlueLight.com.

When Global Sports was awarded control of Kmart's Internet business, Rubin, by then 29 years old, was perceived by many onlookers as a perceptive visionary. Kmart was one of roughly 20 customers, a client list that included WebMD, Fox Sports, the National Football League's Denver Broncos, and the Ladies Professional Golf Association. The remarkable part of Global Sports' success was not its growing client list, but that the company was succeeding while the rest of its dot-com brethren were suffering from a combination of illusion and delusion. The collapse of the dot-com sector had arrived, its fall the subject of daily headlines, but the business press still rallied behind Rubin and his e-commerce business model.

Company Perspectives:

We offer a quality and cost effective solution for our partners to capitalize on e-commerce and direct response opportunities while remaining focused on their core businesses. By outsourcing with us, our partners benefit from our scalable infrastructure, which is designed to operate multiple e-commerce businesses. As a result, our partners are able to avoid the significant capital investments and operating expenses that would be required to operate their online retailing and direct response marketing businesses on their own. GSI Commerce benefits from aggregating the demand of our partners' businesses to achieve operational efficiencies. Depending on the needs of the partner, we can offer either a complete outsourcing of their online retailing and direct response activities or a more customized solution that uses portions of our platform.

Rubin, as Business Week noted in a November 20, 2000 article, did not represent one of the "let's-spend-everything-we-have-on-TV-advertising dot-coms." Global Sports was invisible to any consumer whom it counted as its ultimate customer, a behind-the-scenes company that never tried to create its own brand. Instead, the company relied on the proven strength of existing brands. "What [Global Sports is] trying to do is not develop their own brand name, but utilize and leverage the brand names of their partners, which makes a lot more sense," an analyst commented in a November 11, 2001 Knight Ridder/Tribune Business News article. Another analyst, in the same article, echoed praise for Rubin's approach. "They're one of the real success stories in e-commerce," the analyst explained. "They took a decidedly different approach by partnering with existing brick-and-mortar brands. Back in the dot-com heyday, it was all about building a new brand, and the existing brick-and-mortar brands were going to be replaced by these new-economy brands. Michael Rubin believed that wasn't going to be the case."

Rubin enjoyed robust sales growth after his conversion to e-commerce. Revenue leaped from $5.5 million in 1999 to $42 million in 2000 before recording explosive gains to $103 million in 2001 and $172 million in 2002. Profits were harder to come by, however, a trait shared by the legions of the dot-com companies that failed at the turn of the 21st century. GSI did not record its first profitable quarter until the last three months of 2001, when it registered $258,000 in net income. Although the lack of consistent profitability was a concern, the company's financial state was strong thanks to sizable investments gained through several partnerships. When Rubin began developing an e-commerce business in 1999, Softbank Corp. acquired 30 percent of Global Sports, giving Rubin $80 million to fund business development. In September 2000, the company received $40.8 million by selling a 19.8 percent interest to Interactive Technology Holdings L.L.C., jointly owned by QVC Inc. and Comcast Inc. The investments, coupled with a business model that drew its strength from established and proven brands, mitigated concerns about profitability.

As Global Sports concluded its first five years as an e-commerce enterprise, the company was applying its expertise outside of the sporting goods sector. QVC's investment in the company led to the formation of a Global Sports subsidiary in 2002 whose focus was selling e-commerce services to television and cable networks looking to sell merchandise online. Through this venture, Global Sports signed agreements with Comedy Central, Pax TV, The Golf Channel, and TV Land. The growth of the company's media-related business, combined with its involvement with companies such as Kmart and Ace Hardware, created a need for a new name. Global Sports no longer restricted its operating scope to sporting goods retailers. Accordingly, in May 2002 the company changed its name to GSI Commerce, Inc. to better reflect its diversified interests.

As Rubin planned for the future, his thoughts centered on expansion. "We feel it's very important to be profitable," he said in an August 25, 2004 interview with the Philadelphia Inquirer, "but not maximize profits. That would take away from growing the business." GSI was expected to post its first annual profit in 2004, but the addition of new e-commerce partners such as Kate Spade, Liz Claiborne, Timberland, and Wilson Leathers in 2004 encouraged Rubin to invest in the infrastructure to support its growing roster of clients. The company moved into a new 104,000-square-foot headquarters facility in 2004 and was expected to open another warehouse in Shepherdsville, Kentucky, by the end of the year. Although few industry pundits questioned the financial viability of Rubin's approach to e-commerce, the future progress of GSI ultimately would determine the soundness of its business model.

Principal Subsidiaries

Global-QVC Solutions.

Principal Competitors

Amazon.com, Inc.; Digital River, Inc.; Electronic Data Systems Corporation.

Key Dates:

1991:: Michael Rubin starts a sporting goods distribution business named KPR Sport International, Inc.
1994:: KPR introduces Yukon, its own brand of footwear.
1995:: Rubin acquires 40 percent of a troubled footwear company, RYKA, Inc.
1997:: Rubin combines the Yukon and RYKA brands to form Global Sports, Inc.
1998:: Rubin decides to sell his two sporting goods brands and create an e-commerce company.
1999:: Global Sports begins operating the online business of its first four retail clients.
2001:: Global Sports takes control of BlueLight.com, Kmart's web site, a move that marks Rubin's diversification outside the sporting goods sector.
2002:: Global Sports changes its name to GSI Commerce, Inc.
2004:: A second warehouse is constructed in Shepherdsville, Kentucky, as GSI records robust growth.