Lids tries to regain glory following fashion shift

To the casual shopper, one cap design might look much like another. But subtle changes in design and customer preferences have posed a big challenge for Indianapolis-based Lids Sports Group after years of stellar performance.

Locals are familiar with the business’s storybook start under the moniker Hat World. Glenn Campbell and Scott Molander were managing Foot Locker stores in Indianapolis in the early 1990s when they came up with the idea for a store selling a dizzying assortment of sports caps.

They knew it was an attractive market because many young males collect caps the way women stockpile shoes. But serving the niche was a huge hassle for most retailers, since one fitted style would need to be available in an array of head sizes.

Campbell and Molander ended up opening their first location at Tippecanoe Mall in Lafayette because the mall manager there was willing to give them a shot. Campbell would sometimes sleep in the storeroom rather than make the trek home. If things went well, they figured on opening five stores.

By the time Tennessee-based retail chain operator Genesco Inc. snapped up Hat World for $164 million in 2004, it had more than 480 stores. Today, even with more than 1,000 stores, the company—which took on the Lids moniker after buying the Lids chain out of bankruptcy—remains one of Genesco’s biggest growth engines, Genesco CEO Robert Dennis said in late May.

But there are plenty of headwinds these days, including heightened competition. First, flex-fit hats came into vogue, which shrank the number of sizes retailers had to carry. And now “snapback” hats, those with a plastic size-adjustment strip in the back, are back in style—wiping out the need to stock more than one size. To no surprise, the suddenly simplified business has attracted a host of new players.

Dennis told analysts in late May that snapback styles “continue to be an important trend in the headwear business, and we continue to do a substantial amount of business in the category.”

The downside, though, is that snapbacks generally carry lower prices than fitted hats, and winning over customers “has required us to become somewhat more price-competitive in the category,” shrinking margins.

Dennis said Lids is trying to nudge consumers toward fitted hats, in part by debuting new styles, “but snapbacks continue to be the dominant trend right now.”

The challenges are showing up in the numbers. Genesco’s hat unit now has reported four consecutive quarters of declining same-store sales—an unusual malaise for a business that from 2001 to 2006 posted a miraculous 19 straight quarters of increased same-store sales.

Analysts note there are some good things happening. Sales are soaring in Lids Sports Group’s online business, which targets customers who are devout followers of out-of-market teams. And analysts are encouraged by a new deal with Macy’s that will put Lids outposts in 200 department store locations.

Lids also is diversifying beyond the noggin. Its Lids Locker Room stores sell a broader array of merchandise than just hats, and its Lids Clubhouse locations serve as single-team fan shops. In addition, its Lids Team Sports unit aspires to dominate the highly fragmented business of providing uniforms and other equipment to youth organizations, high schools and universities.

Genesco management has a long history of savvy management of its various chains, from its youth-oriented Journeys shops to its Johnston & Murphy shoe stores. That record of success caused investors to give the company the benefit of the doubt earlier this year, which helped push Genesco’s stock from $50 to nearly $75. Disappointing results announced Aug. 29 knocked the stock way back to $63.

In a July report, Sterne Agee & Leach thinks investors were wrongly factoring in a recovery for Lids Sports Group, which accounted for 30 percent of Genesco’s $2.6 billion in sales in the fiscal year that ended in February.

“We do not see any catalysts for a recovery of this business,” the investment firm said.

Indianapolis has a big stake in seeing that recovery happen. In 2010, Lids Sports Group announced plans to add as many as 571 jobs here by 2015. Employment at its northwest-side headquarters and distribution center at the time was about 250. Genesco and Lids officials did not respond by IBJ deadline to a request for updated employment figures.

To be sure, even when Lids is sputtering, it’s still a big earnings engine. Despite reporting a 4-percent decline in same-store sales in the last fiscal year, it contributed half of Genesco’s $168 million in operating profit.

But Genesco CEO Dennis, a former Lids CEO, is far from satisfied. In late May, he told analysts that a variety of initiatives are in place to bolster results. He tabbed Lids and Journeys as the two divisions “where our upside growth potential is greatest.”•