BEHIND THE NEWS: Hat World helps propel parent’s stock out of slumber

When Indianapolis-based Hat World Corp. announced its $165 million sale to a Tennessee firm 17 months ago, it had posted increases in same-store sales for an impressive 27 months in a row.

Now, make that 42 and counting.

Such a streak is almost unheard of in the rough-and-tumble retail world, especially for a firm wrestling with the inevitable distractions that go along with the transition from independence to ownership by a publicly traded company.

“We have maintained the same momentum we had pre-acquisition and really haven’t missed a beat,” said Bob Dennis, Hat World’s CEO. “That isn’t typical of acquisitions. There often is a bump, and we had no bump.”

His explanation: Nashville-based Genesco Inc. didn’t mess with success, choosing to leave the cap retailer headquartered here with its management team in place. Early this year, the company expanded into 200,000-square-foot quarters on the northwest side, where it now employs 250.

That vote of confidence has done wonders for Genesco, which operates more than 1,000 stores under such names as Journeys, Johnston & Murphy and Underground Station, and sells shoes wholesale.

Genesco shares were in prolonged slumber before the Hat World purchase closed in April 2004. But since then, they’ve rocketed nearly 70 percent higher.

Chalk it up in part to the addition of fast-growing Hat World to Genesco’s stable of generally more mature businesses, the investing Web site Motley Fool wrote last month in a flattering column headlined “Hats Off to Genesco.”

“Usually what jolts a company out of its lethargy (at least temporarily) is an acquisition of a younger, more aggressive business, one that is growing by leaps and bounds,” wrote columnist Will Ashworth.

Hat World, one of Indianapolis’ big entrepreneurial success stories of the past decade, fits the bill. Since its founding in 1995, the chain has grown from a single location in Tippecanoe Mall in Lafayette to 589 North American locations, most operating under the names Hat World or Lids.

The chain racked up $249 million in sales in the fiscal year that ended in January, and Buckingham Research Group projects sales will increase to $295 million this year and $336 million next.

But sales aren’t the full story. In the first fiscal quarter, which ended in April, Hat World’s $62.1 million in sales represented just 22 percent of Genesco’s sales, but were a far larger slice of profits.

In a conference call with analysts in May, Genesco CEO Hal Pennington said Hat World might be able to support more than 900 locations.

“I want to stress a very important point about Hat World that may not be well understood by some investors,” Pennington said on the call.

“The combination of Hat World’s higher operating margins … combined with moderate [same-store sales] increases and aggressive new store openings will have a meaningful impact on expanding Genesco’s overall profit margin, and this is a key part of our overall growth strategy.”

All this has worked, in part, because Hat World has a stronghold on cap retailing. Most of its rivals only dabble in headwear, and as a result they have less selection and are slower to respond to fashion shifts.

Yet Hat World wouldn’t be as far along in its expansion without Genesco’s financial firepower, which will allow it to add 90 stores this fiscal year, double the number opened in the same period a year earlier.

Hat World also has shifted its construction and real estate functions to Genesco, which has the clout to drive down construction costs and negotiate leases under more favorable terms.

Then there are the synergies that have surfaced between Hat World and other Genesco chains, such as the urban footwear retailer Underground Station.

Because many urban consumers like to wear caps that complement their shoes, Genesco opened Lids and Underground Station stores next to each other on Fulton Street in Brooklyn, with a passageway between the two.

“It’s a very compelling offering,” Dennis said. “It’s a little like, ‘One plus one equals two and a half.'”

‘Sterling execution’

Genesco is demonstrating “sterling execution overall,” David Turner, an analyst with BB&T Capital Markets, said in a report. In the most recent quarter, all its retail chains posted same-store sales gains, with Hat World advancing 7 percent.

Still, staying on track won’t be easy. As Dennis puts it, “Retail is a collection of little things done well.” Hat World now faces the challenge of keeping operations humming while it simultaneously grows faster than it ever has.

But opportunities abound, Pennington told analysts this spring. Hat World already is seven times bigger than its nearest competitor, giving it dominance of a lucrative niche that shows no sign of shrinking.

“We see caps or hats continuing to be a meaningful part of the attire of our targeted customers,” 15- to 35-year-old sports enthusiasts, he said. “This has a lot of legs.”