The "next big thing" never excites me.
I'm not a "trend investor" -- someone who looks to latch onto a popular trend to ride the growth. But I have to say, after shopping at The Walking Company and seeing how it helped my wife, I took a closer look. And now that I've learned more about its parent company, Big Dog Holdings (NASDAQ:BDOG), I may need to give trend investing another look.
In my first article on the company, Big Dog Holdings CEO Andy Feshbach let us know what was going on with his company's iconic brand, Big Dog. Big Dog has been a great value investment for him, but it's not the future of the company. That's planted firmly underneath the feet of The Walking Company.
A bargain hunter in operator's clothing
I didn't know that the Big Dog segment was in bankruptcy when Andy purchased it many years ago. But I did know that in 2004, The Walking Company was also in bankruptcy. Steve's Shoes, acquired in 2005, was too. And I am guessing Andy didn't pay much for Footworks, either. It looks like what we have here is a value investor who knows how to operate distressed businesses and turn them around. Last I checked, didn't that Buffett guy say investing is most successful when it is most similar to business?
Feshbach revealed that his background is in distressed investing. One of the reasons he likes to focus on bankrupt businesses is that they have "forced transactions." People want to get the deal done, so a bidding war rarely breaks out, especially since there usually aren't many suitors at the table. Competition for assets tends to make prices go up. That's good, because under the right circumstances, it can mean getting big returns using very little capital, especially when you know how to operate a business.
What's so special about The Walking Company?
If you've read any of my stuff in the past, you know I'm a competitive advantage guy, especially when the advantage is not obvious. When it's obvious, the price gets bid up in the stock market.
So is The Walking Company in the "right circumstances"? I really think it is, because I believe the company has an advantage in that it does things just differently enough to stay a step ahead of the competition. Let me explain.
The first thing a company has to do is decide where it's going to play the game, or its position. Despite what some may think, The Walking Company does not sell shoes. According to Andy -- and as my experiences at the store confirm -- it sells comfort. Shoes just happen to be the delivery mechanism. This is very similar to Select Comfort (NASDAQ:SCSS), whose adjustable-firmness mattresses deliver comfort to customers.
Why sell comfort? It can create a conditioned response, which in turn creates a sticky customer, especially when you have the capability to serve customer needs. Remember my wife and her foot problems? The salesperson at the store listened to her needs, offered up solutions, and helped her as she tried on various shoes. Once she found the ones that were most comfortable, she was hooked. And that's exactly what Andy is looking for. He mentioned that you can't replicate this experience over the Internet. The store and the salesperson are necessary tools to sell comfort.
Does a salesperson at Foot Locker (NYSE:FL) or Finish Line (NASDAQ:FINL) sell comfort? I don't think so. They sell style and fashion when peddling the latest products from Nike (NYSE:NKE) or Adidas. Does a salesperson at Nordstrom (NYSE:JWN) who sells Uggs by Deckers Outdoor (NASDAQ:DECK) sell comfort? Yes, they do. But they don't focus on it as much as The Walking Company does.
The little bit of difference can go a long way. That's because, according to Andy, The Walking Company works across the "3 Stages of Comfort": fashion, daily, and ultimate. It does things a little differently than Nordstrom in the fashion arena. It has shoes for work and walking that can make your day better. And it sells some comfort brands that go above and beyond mass-produced shoes.
Customers have an unmet need, and The Walking Company is there to meet it just a little bit better than others out there. That little bit can go a long way.
Creating an ecosystem
You can get a pair of Nikes from lots of different places. How many stores do you know that carry ECCO shoes, the kind my wife wears today? In fact, have you even heard of ECCO?
That's another interesting aspect of The Walking Company: It has a symbiotic relationship with its suppliers. As The Walking Company grows, more people learn about brands that offer better comfort and style. As more people learn about these "under-distributed brands," they generate increased demand. Increased demand requires more stores to supply the demand, and the circle continues.
More so than with other retailer/supplier relationships, especially at this stage of the company's life, there is a win-win situation with growth. Later, I imagine there will be a struggle over how much value the participants capture. But for now, as they work together, I think both make their industry stronger and more valuable.
The Foolish bottom line
I am so happy I had the chance to speak with Andy Feshbach, to learn more about Big Dog Holdings, and to share it with you. As I said in my first article, the company is changing. And I think that change spells opportunity.
For more on the companies mentioned, check out:
While not all small companies turn into big ones, small companies can be great opportunities. At Hidden Gems, Tom Gardner and Bill Mann search for those underappreciated companies. And given their performance, they've found plenty. To learn more, come take a free 30-day trial.
Select Comfort is a Hidden Gems recommendation.
Retail editor David Meier can't wait for the next company his wife turns up. He owns shares of Nike, but does not own shares in any of the other companies mentioned. The Motley Fool has a disclosure policy.
