Stock Talk TMF Interview With
Wilsons The Leather Experts Chairman & CEO Joel Waller

With Dave Marino-Nachison (TMF Braden)
November 30, 1999

Minneapolis-based Wilsons The Leather Experts (Nasdaq: WLSN) is a retailer of leather apparel and accessories with stores in malls, airports, and outlet centers. We spoke with Chairman and CEO Joel Waller about growth opportunities, spreading profitability beyond the holiday season, and the Gap's (NYSE: GPS) demand that everybody get into leather.

TMF: Maybe you could start off by giving us a description of Wilsons for someone who, unlike myself, doesn't own one of your wallets.

Waller: Wilsons Leather is the largest specialty retailer of leather apparel and accessories in the United States. That kind of rounds it up. We have probably been that for the last 10 years. Since 1989, we've owned a dominant share of the leather apparel market, somewhere between 15% and 20% of all leather apparel sold in the United States [and] we see our market share increasing. A much smaller percentage is our accessory business because that's a much bigger business.

"We had always thought of our accessory business as an add-on business and today we look at it as a stand-alone business."
We run a number of divisions. We have our mall-based stores, which carry apparel and accessories. We have 32 airport stores, which are accessories and executive accessories. We have an outlet division which includes two types of outlet stores: one is an accessory outlet store presently called Walletworks -- about 40 of those -- and then we have Wilson Leather outlet stores in the big mall projects. We've just started an expansion program in the manufacturers' outlet malls.

TMF: Can you give us sort of a rundown of your store lines?

Waller: Generally speaking, we carry the same merchandise in each division, but it's focused on the customer that walks into that store. Today we have systems that do what we call "clustering." For example, if you were to walk into a store in Tyson's, you would look at the merchandise at a Wilsons Leather store, and then you would go to another Wilsons Leather store in Pentagon, you would see different merchandise. Maybe 75% of it would be the same, but we clearly focus on the customer who walks in. For example, Tyson's is more of a suburban customer, Pentagon is more of an executive or business customer, Springfield might be a little more blue-collar. Wilson stores do about 75% of their business in apparel -- that's outerwear mostly -- and about 25% of accessories and small leather goods and executive things of that sort.

[Note: Tyson's, Pentagon, and Springfield Mall are Washington, D.C.-area shopping centers.]

TMF: You've got about 500 stores at present?

Waller: We've got about 540 stores today. We run about a 275, this year, holiday store business where we open up stores in October and November and we actually close them in January and February.

TMF: The holiday is really your most important selling period. How do you prepare for that?

Waller: Leather is a very unique item. It's still an item that has to be handcrafted and cut one piece at a time, so we really have to start preparing pretty early. We're a totally integrated company. If you were to go look at the Gap, for example, they're a marvelous retailer. They have a marvelous distribution system, they even contract manufacture with people overseas and we do all of that but we go one step beyond.

We actually get involved with the raw material. We actually help tanneries develop raw material; we go with the tanneries and buy hides from hide dealers and have it tanned to our specifications and sent to the contract manufacturers, then we bring it back here and distribute it to our retail stores. It makes us rather unique when we do it that way, but because it's a unique product and made one at a time we really have to start very early in the process.

If you look at this last weekend, which has been a real big weekend for retailing, we had items where we sold 500 to 600 pieces of ladies' jackets, and to get enough of those made early -- we'll probably sell 60,000 or 70,000 pieces of that one style -- we actually have to start making them back in June and July.

TMF: When you're talking about the holiday season, is the breakdown of products sold -- in terms of apparel and accessories -- different from it is over the rest of the year?

Waller: The thing that changes is accessories. Although it's an important part of our business, when we get to the summer months... accessories are a bigger percentage of our total sales because it's so warm and we don't sell a lot of outerwear, which is a big-ticket item for us.

TMF: Maybe you could talk about your revenue breakdown over the course of a normal year between the different items.

Waller: We do about 65% of our business in the fourth quarter. We're clearly focused on that. But we have been working very hard to spread that and to spread our profitability. This year was the first year in our history that we've ever had a profitable third quarter. We see that continuing in the future and our plans are to be profitable in at least three quarters.

TMF: How is that done?

Waller: It was by focusing on the different customers that come out at different times of the year. So for example, in July and August we're selling to the fashion customer. When we hit Thanksgiving weekend, when it gets cold, functionality takes over.

"The propensity to buy leather is much greater overseas than it is here."
We have had two very successful years. I'm basically saying this is a fait accompli this year because obviously I've seen Thanksgiving weekend which was very strong for us. We had a plan, and we started executing it well two years ago, of changing Wilsons from the dominant leather retailer in the United States, to becoming the dominant leather brand in the United States. We have focused on specific customer groups. You heard me talk about the functionality; we call that our Wilson label, that's our basic customer.

Where the biggest growth has been is two areas. Number one is going out to the young customer. We started to look at this whole "Generation Y" and we felt that this would be our strongest growth area. If you go look at our third quarter, for example, a third of our business was in what we call that young, teenage customer, that 15- to 22-year-old. We focused on two labels, Maxima for women and M. Julian for young men. Not only was it a third of our business but it had increased 50% over the previous year. They're a fashion customer. They buy in June, July, August, and September and really make a big difference to our business.

Another thing was our second most important label, which was our Pelle Studio, which is focused on the next group of customers, the contemporary customer. That's the customer probably out of college, starting out in the workforce, 25-35, very fashion-oriented. That was also extremely strong in October and continues on up through today.

TMF: Has the shift to the younger market required lowering your price points?

Waller: Not at all. This is a customer who has money, and if you give them what they want, clearly they will pay for it.

TMF: Let's move back to your merchandise breakdown a little bit as far as what you sell in terms of percentages where apparel and accessories are concerned.

Waller: Apparel is about 75% of our business today.

TMF: Is that the breakdown you are looking for?

Waller: No, our accessories business has been increasing. If you looked at it five to six years ago it was probably 12% or 13% of our business. Our goal is to get it to about 28% of our business.

With the young customers we talked about, we sell wallets, we sell handbags, belts. Our biggest-growing area, though, is what we call "executive," where we go after young business customers. That's what we sell in our airport stores. We sell briefcases and planners that we design specifically for that customer. One of the most exciting things we had this year: One of our designers came up with the idea to create a briefcase for a working woman. No one's really done that. We did it, we tested it in a hundred stores, and it was extremely successful. We rolled it out for this Christmas.

By focusing on the business customer we have built a very successful accessory business that we think will help level out our sales and our profitability, and that's one of the main reasons we think we can remain profitable in the third quarter and become profitable in the first quarter.

TMF: It sounds like when you're talking about your growth in accessories sales, that you're selling more products that someone would buy one thing at a time rather than buying a jacket and a wallet, or a jacket and a belt.

Waller: Exactly. We had always thought of our accessory business as an add-on business and today we look at it as a stand-alone business. One of the things that's happened is that we have established ourselves as a brand.

When you're looking at customer growth as we are, it has clearly made us understand the advantage of going across different channels of retailing. We have had a website for a little over a year now that has really been a store locator and talks about our store promotions. We will bring up a pretty sophisticated e-commerce site in about a week or two with a very soft launch. We're promoting it in our stores only, so we're not doing any outside marketing -- but we really believe that gives us the ability to target specific customers.

TMF: How significant of a driver of sales do you think the website can be?

Waller: Well, nothing significant this year and very small next year. But clearly what it's going to do is build the brand across all our channels. For example, we have 32 airport stores today. We get more recognition from those 32 airport stores than we do from all 500 other stores. In the city of Minneapolis, we have two stores that 5 million people a year walk by. In the Atlanta airport we have four stores that 20 million people a year walk by. Those 32 stores probably have 125 million people a year walking by them. Now if they are going to go to the Internet and they start to see us there, and then walking though the mall they're going to see us, it clearly is going to start to cross all levels.

TMF: Where do you think your total store build-out is domestically?

Waller: Today we have about 500 mall Wilson stores. We could probably be at 600, probably tops there may be 650. I think that airport probably could be 60 to 70: in the Los Angeles airport I could have 8 or 10 of them. I think the outlet division probably could be a 250-store business.

TMF: And what about overseas?

Waller: The biggest expansion, of course, is overseas. The propensity to buy leather is much greater overseas than it is here. For example, England has bout 55 million people and does about half of the leather business we do. We have 270 million people and do just under $2 billion, England does just under a billion. Germany does four times that. Nobody does what we do, even in those countries that sell a lot of leather. They are where we were 25 years ago. What we did was go out and consolidate an industry.

TMF: How much do you believe you benefited from the Gap's campaign this fall?

Waller: [Laughs] I'm laughing because we actually had analysts call us and ask us how much we thought it was going to hurt us. I would rather be the best in an up market than the only one in a down market. If you go back eight or nine years ago, this was a $3 billion-dollar business. Today, it's a $2 [billion-dollar business]. If you go back and look at the growth of the industry, it grew with the big bubbles of the young -- so when we had the Baby Boomers it grew, when we had the generation X'ers it grew dramatically. Generation "Y" is the biggest group we've seen since the Baby Boomers; it's over 70 million. The bubble for our customer, the 15-20 [year-olds], there's 30 million, and they predict that the bubble will not drop below 30 million for 8 to 10 years. That's really the Gap's customers. They love the product, and the more they're aware of it the more they want it, and we just have the greatest value. We love that they did it.

TMF: Thank you very much.

Waller: Thank you.

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