Jim Weber Takes It To The Street MAY 23, 2005 -- I'm going to take you quickly through a high-level overview of Brooks in our marketplace, and then really talk about our strategy and what we're trying to accomplish in this great category. Brooks, like many of the Russell brands, has been around for a long time, since 1914 in athletic footwear. We do about $170 million in brand sales worldwide. About 35 percent of that is under licenses in a couple of countries. Canada, Japan and places like Chile being the key ones. But 65 percent is direct. Fifty two percent of our overall sales are international. The balance is domestic so we're pretty balanced but domestic is growing faster and should be growing faster from where we are. The key thing that sets the stage to talk what we're all about and the success that we're having and that we believe we can continue to have is that we're focused on running. In athletic footwear, when you look at the brands that have been around for awhile and how the brands are set up in the marketplace, we're the only brand - other than Mizuno, but if you include baseball and cleats and everything else - that is exclusively focused on running. And that's a great place to be right now. We think, not only is the category strong, but we're uniquely positioned to benefit from the growth in this category. And there is a surge in running. A lot of people have referred to what's going on now as the second running boom, the first one being in the late 70s' and early '80s' when Brooks really came into being in performance running and Nike really became a force in the jogging boom in the late 70s' and early 80s'. There's never been more people running and jogging ever before than there are right now today. It's not really a running boom in the classic sense driven by more hard-core runners; it's part of this fitness lifestyle boom. And it's broad-based from baby boomers to young folks. Women are really driving a large part of it. Some of the trends that are behind all of this. Starting on the consumer side - obesity and diabetes are major issues. Thirty percent of al l teens are obese according to the definition. Big problem. Women in sports. One phenomenon that's going on right now that's incredibly powerful and exciting is with Title 9 in colleges, we've created lifelong athletes on the female side. Like we've always had for the most part on the men's side. You grow up playing in high school and college and you typically stay active in some form for life. Women are staying active. They're getting married later. They're having children later. The fastest growing segment in running is women 20 to 35. And baby boomers trying to stay young. They have a lot of money to spend, but staying youthful is a long-term quest for most of us in this room. On the running side, women and youth again are driving a lot of the growth. Particularly you see that a lot in race participation, whether it's 5K or 10K or marathon. The percentage of women in the last ten years in most races has gone from 30 percent to over 50 percent. The finishers and registrants in these races are women. Big change. There's been a huge proliferation of races, and it's a very popular thing to do. Not everyone can climb Mount Everast, but you know what, anyone can run a marathon. A lot of the courses are staying open 7 or 8 hours so a lot of people are walking marathons. And the participation base has broadened dramatically. And there's a lot of races - most in fact - that are tied into causes, and raising money for a local charity or a national effort that gets a lot of people involved in the space. Walking and an active lifestyle are a huge driver. Again, we see not as much as a running boom, but part of the fitness boom and running in the middle of it. A little bit of numbers on the category. It's a large category and growing. (Athletic footwear) sales of just over $10.2 billion at the wholesale level, and running is 29 percent of that category. On the participation side, it's very broad-based. According to SGMA numbers, it's 37 million runners. But on the frequent side, a little over 10.7 million. These are folks that do over 100 days a year, and that's been growing nicely over the last five years. I talked a little bit about races. Last year 423,000 people in the United States finished a marathon. That's a pretty significant number, and when you go back into the early 80s during the running boom, that number was 100,000. So we're 4 times what it used to be and it's very broad-based. The average finish time has gone up an hour. That's not because they've made it harder. A lot of us are running a lot slower than we used to. It's broader-based participation. So there's a lot of good fundamental factors driving the running category right now. It's very, very strong. You're seeing it on the silhouette side, and the fashion side, and the casual side. The running silhouette has always been a key part of the casual family footwear area, the retro-classic footwear area. It's a cool shoe. But underneath all that, what's driving the kind of shoe that we focus on and sell is very strong consumer dynamics. So let's talk a little bit about the Brooks strategy. We've been around a long time. We were a lot like the other companies in the 80s' and 90s'. We had basketball shoes. We had cross-training shoes. We had casual lifestyle shoes. We had court shoes. We had price points that ranged from $19.99 to $120. And the truth of the matter is that we were just like 6 or 7 other footwear brands - only a lot smaller with a lot less marketing spend - competing in that environment. So we shifted our strategy five years ago. And here were the key philosophies that drove it. First, different is essential. And we really wanted to define our brand from a retailer and customer point of view that was distinct from Asics, New Balance, Nike, Adidas, Reebok- everyone else in the space. And that was critically important to us. And we thought we saw a window in the market to do that. Secondly, we wanted to create a business model and put a discipline around that that we could be successful from a profitability point of view. Finally, brand creation. We have a long history in this space. Again, we compete with a lot of strong brands so we really wanted to dedicate around this performance running scenario, and that takes not only vision, but a lot of passion and focus on it. For us, our mantra was it's not about brand awareness, it's about brand relevance. If you're a runner or you're going to start running and you're going to talk to a friend that knows something about the running category and what kind of shoes you should get, we want Brooks to come out of their mouth. So we're not fighting to be on the tip of everyone's tongue, but only what's going on in their running category. If you're looking for a pair of shoes because you're just signed up for your first 10K, and you're talking to somebody that knows what's going on there, we want to be on that list. Finally, teams win. We've been through a lot as a company and we hadn't been successful and profitable through much of the 90s'. So we really focused on creating a team that could deliver results - get in touch with the reality of where we were in the market place and be accountable for our results. I think we have some good success. When we dedicated ourselves to performance running, we jettisoned 60 percent of our product line. We jettisoned over a period of two years over half our sales base because it was all under $75 price point. More than half of our sales were under $75. We don't make a shoe under $75 in the training shoe. We have a track type for $50 at the high school level. It's a race shoe. But we dedicated our whole organization around inspiring people to run and be active. And this is a little bit different out there in the marketplace. Back then, it was very different. And it's still a little bit different. You know, Nike. What a brand, What a company. A lot of great product as well. They really define competitive spirit in a lot of footwear categories. The billboard at the Atlanta Olympics really capture that, “You don't win Silver. You lose Gold.” It's all about being out there for Brook's brand. We're a glass half-full brand, inspiring people to run and be active. And it's very inclusive, and it doesn't matter if you finish in 5 hours, 8 hours or 3 hours - it's about being out there. So we think that's different. So in putting a strategy around this focus. This is an age-old strategy. This is a strategy of how you build enthusiast sporting goods brands in my view. And we've looked at a lot of brands over the years, more on the equipment side than anything else. And this is a strategy in my view that New Balance was executing 15 years ago. This is a strategy that Nike was executing in running footwear 30 years ago. It's starts with great product. And we focused all of our resources and more on 60 percent shorter product line and made it better and better and better. We got a biomechanics lab. We've done clinical research on the foot and biomechanics of the foot. We've invested a lot of R&D and advanced materials, etc. We got a team that I think can work anywhere in this industry. It's a lot smaller than what exists in a lot of our competitors, but it's focused. So a lot of that is about performance, function, innovation, and of course, quality. That's always going to be in a Brooks shoe. You'll never see a fashion product or a running silhouette at $40 that calls itself a running shoe. You really shouldn't run on it because it really isn't set up right. Every thing we build is equipment first. And then it ought to look great. So we made tremendous headway on style and design too, and we've got a great team again on the product side that's come mostly out of the industry at places like Nike and Adidas. But doing it in a Brooks way. So we're competing very well now on the product side. Best in class customer service, and that essentially comes down to doing what you tell them you're going to do and delivering on time. We are the leader in customer service. It's very important because we haven't had the retail clout to push products into channels and say “Take it or else.” We're in service mode with retailers. We do a pretty good job on that. How many of you shop for shoes and you're a 10 1/2 E and you went in to find the perfect shoe on the shelf and they didn't have your size? It's a big issue in footwear. Inventory replenishment is a major part of the game, and we're real good at that. Part of it is that we have a tighter line. Most shoes come in one color. So we can forecast and service not only futures, which are easy, but at-once activity on a weekly basis as well. Finally, marketing energy. I'm going to take you through a little bit of our marketing. It's really a grass-roots phenomenon. We're where runners are. We've got a lot of momentum as a brand. We're kind of underneath the skin of this category with local shops at a lot of these events. We're with runners every day. That's where our brand really lives, and that's where we're building our brand. So this is a statement that I think on the equipment side is true. You can go back and look at any great brand in sporting goods and trace it to how enthusiasts found it, fell in live with it, and it's usually it's found at specialty shops - not always - and told their friends about it. It's fundamentally a word of mouth phenomenon. That's the mode that we're in right now. And we feel very strong about our product and we've brought to bear there. Now we're creating trial on it. We're doing that with team focused strategies and getting out in front of runners. The things that's critical to understand is that people who buy a running shoe to run on, if they've been running for awhile at all, they're pretty smart in what's working and what's not. A lot of people feel that two weeks into the shoe, you know if it's working or not. In your 15th mile of your first marathon, you really know if it's working or not. If you're blistered up, you're toast. You're not going to finish that race. So this is Runner's World Magazine data. What's the most important thing to a runner when they're out looking for a shoe. The first element is function. It's not brand, it's not cosmetic, it's not color - it's function. And consumers cheat a little on this. Everybody likes to build a shoe that looks good. The key is for runners, they do know typically within a week or two if that shoe is working for them. So in comfort, cushioning, injury prevention, stability, motion control - we excel there. And we looked at this, we said, “That's us.” We're going to deliver that. What we thought four or five years ago and it still exists today, is a brand like Nike that still makes a lot of great running shoes also makes a lot of great style, fashion-oriented shoes. But they don't tell you at Foot Locker on the wall which is which. So there's a lot of people running on the wrong shoe and over time it causes problems, especially as they get older. So this is an area that we really excel in and compete very well on. And the other key thing about the running category is that the average runner buys 2.6 pairs a year. So it's not a razor blade, but it's a great business because runners become very, very loyal. So our biggest marketing challenge is creating trial. Our biggest opportunity is to keep that customer right on until they're in a wheelchair because if we keep that shoe consistent and it works for them, they're going to stay loyal to that shoe. If Chris is an Asics guy and he's been an Asics guy for a long time, he buys a couple pairs at a shot - he's a typical runner. So our challenge is to get him to try Brooks. We won't get them all, but that's how we're growing our business. So once you create a customer, you've got them. We've won a lot of awards and I'm not going to go through this in depth because a lot of brands have won a lot of rewards. But our product has improved dramatically and it's what's driving our growth. It is the ticket to entry in this category. You can't compete without fundamentally sound running shoes. This is our adrenaline GTS. Visible technology is what everybody's talking about right now at retail right now with the Adidas One and Nike Shox and everything else that's going on out there. Some of that stuff is sound and some of it in our opinion isn't from a running point of view. But this shoe has a lot of technology in it. But again, the real test is one or two weeks into it. All shoes have some form of stability for most runners unless you're a very efficient and elite athlete and essentially run on your toes. A lot of elite runners are literally not even striking their heal. That's why on the race shoes, you don't even see a heal on it. But we've created this progressive, diagonal roll bar, and this always on the inside of your foot and that's what creates stability in managing the rolling in of your foot as you run. And that's critical for most runners. The vast majority need some form of stability in their shoe. And there's a degree and range of stability created. This progressive roll bar so instead of just stopping you rolling, it does it in a progressive way. It gives you a very smooth ride for more and better cushioning. But a great running shoe is a combination of cushioning, stability, fit, a comfortable upper, no chafing, and the right setup for your biomechanics. The perfect shoe for you is not the perfect shoe for everybody. So we've spent a lot of time here. We got a lot of good things happening on the product side, and we've spent a lot of time here in the lab. We've got new material and compounds that are going to improve resiliency, reduce fatigue in the materials, so you get more miles our of your shoe. They won't last forever so they do fade and people need to upgrade. That's why as I said people by on average 2.6 pairs a year. But lots of good stuff going on the product side. This positioning is showing itself in the marketplace. This is Sportscan Data that's not perfect. It doesn't include specialty running accounts, or sports specialty. It doesn't include Foot Locker, but it does include the balance of retail. And this is average price in the running category, and Brooks has the highest average price in the category. It's $76. Which it should. We don't have anything below that price at retail. It reflects the positioning that we talked about. So now consumers and retailers are starting to see that in the marketplace. And this chart really lays out a distribution strategy that went part and parcel with our brand strategy, and also our product strategy. When we shifted our business to the performance running, $75 and up, four or five years ago, we looked at channels of distribution, and I've got a progression here from specialty running shops; then we got people like Road Runner and Zappos; athletic specialty in the malls that are more full-line, which we would call Finish Line; department stores; general sporting goods, Dick's, Sports Authority, Sports Chalet, Academy, Hibbett's, Chick's, folks like that. We went back out with our brand. We exited all the channels to the right. We were in Kohl's, Shoe Pavillian, DSW, Famous Footwear. We were in there with $20 or $30 product that wasn't quite profitable for us because we're not a low-cost producer compared to people going after that, and now we got Starter in Wal-Mart. . So this brand focus from a channel point of view has been very powerful for us. We are now relevant to retailers because we're bringing them a performance brand positioning with performance product that gives them a full collection of product on their shelf. So we're rebuilding relationships with people like Dick's, The Finish Line and Sports Chalet, with our brand positioning very, very successfully. The core of our business is specialty running shops - they're very healthy, they've never been stronger. We think there are just under 600 of those across the U.S. And they are in the best case, the center of the running community where they operate. It's where you sign up for races. It's where you get in a running group. And they don't sell shoes, they sell solutions. They're looking at your foot. They're talking to you about how much you run, and they're really trying to get you in the right shoe. And that's why you might come back. They're seeing a lot of the new runners. Team and training and other programs like that send the new folks into these stores to get fitted, and geared up for the race that they're training for. They've done a great job of attracting new runners, and there's been a lot of new runners over the last five years. This has been powerful for us. We're different than New Balance. We go in and present to retailers and we're not at Kohl's for $40; we're not at Big Five for $40. We're a performance brand. So we're giving the retailer a different merchandising mix than what some of their other competitive retailers are carrying. This is market share data in the specialty running channel, which for us is a critical metric because this channel is powerful. They're a key influencer channel. There at the center of the running community. In the last two years, we've gained about 3 points in market share here. We're now the number two brand in the channel. Asics has been number one for a long, long time and continues to be number one. Our goal is to get well into the mid-twenties here. And we've been focused on that for five years. We're making progress, and we're going to continue to remain focused on this. And we're doing it very profitability. These are strategic accounts for us. They're our core customers. These specialty running accounts represent over 70 percent of our sales in the United States. So we're very focused on them. We're the only brand that will look them in the eye and say, “You're our core customer and we want to grow with you.” And we're working very closely with them. On the marketing side, I mentioned training trial and connecting with key influencers, the Brooks Hanson Olympics project, I believe it's the number one distance-training program outside Nike in the United States. Based in Michigan, they've got around 20 male athletes. They live in houses and do it the old-fashioned way, training as a team. And they also work in the Hansons retail stores in the Detroit area. And we sponsored them and they were able to add another house for a women's team. Their goal is to have about a dozen women on this team. The overall goal is to put an American athlete on the podium in Beijing in distance running. And there's been a twenty year gap in American distance running excellence locally and we hope that this program is an integral part of that resurgence. Hanson had an opportunity to sign up with Nike and had an opportunity to sign up with Reebok and others. Literally, they chose us and we chose each other. And it's been an excellent connection for us back into competitive running track & field. On the outdoor side, there's a guy by the name of Scott Jurek, who has set the record now and has won six times in a row the Western States 100 Mile Ultra Marathon. They include 10 to 15,000 feet of elevation change so this guy's incredible. We have a full line of outdoor trail products from head to toe in footwear and apparel and Scott is not only an incredible athlete, he's also a physical therapist and a body mechanics expert. So he's helped us develop that product. One of the key programs for us has been sports medicine. And we've been involved in stability and motion control shoes for pronators and people with severe pronation issues that cause injury over time. We've been developing great footwear for them. So we've always, always had credibility with the sports-med community. We talk to them. We market to them. We talk to over 50,000 docs, physical therapists, sports medicine professionals a year. And most of these running shops are also tied into them so they know feet, they know injuries, they know issues. But we're trying to feed them on the state-of-the-art in footwear. We get a lot of referrals out of these folks that are literally sending them right into the stores to buy Brooks. On the event side, in advertising being a part of this, we're really focused on runners. So all our advertising is in vertical running magazines like Runner's World and Running Times. On the event side, we touch several hundred events a year in some fashion. This is the Marine Core Marathon, I think the fifth largest in the United States. We just signed on with Twin Cities Marathon. But we touch hundreds of small events in some way. We've got twelve marketing and tech folks in the field with these hunt elements that are all set up so we can set up a Brooks try-on session and other things from high-school track meets all the way through to 5ks, 10Ks. In business, you work hard in creating product and selling product and taking care of your customers, and running your business, but along the way you build a brand. From the very beginning we've been very deliberate about how we want to position Brooks and how we want to build this into a lifestyle brand. These charts can never capture everything, but think of this as a center of gravity for these brands in performance running. So premium/high-quality/value on one axis, casual/technical/authentic on the other. When we were back in 2000, our center of gravity was well down due to all this product we were selling at value family-footwear casual price points. We think we moved ourselves up into this area, and Asics is up in this area too. But over time, we really want to create a lifestyle brand for this running and active lifestyle. We think we're doing that. It's an inclusive focus on the brand so it's not so much about serious runners. It's about serous product and the truth of the matter is fitness runners and casual runners and walkers are the ones that really need the serous product. This is a brand positioning that we think we can own, and that we can set ourselves up distinctly from the big folks, in particular, and have sustainable success around that. How that's captured and it really goes back to getting people fired up about running. Our current campaign is called 'Run World Run.” And we're doing a lot of very creative stuff around here. It's different. It's celebrating the run. Hopefully, it draws people in. It's a little bit inside because we're talking to runners. We're not talking to the broader population. We're speaking to runners with this strategy. But we're doing a lot of creative things around this. On the public relations side, getting product placed. We're creating cartoon videos that are a little bit under the radar screen. You can check our web out in about two weeks and you'll see one that we created. They're fun, but a lot of viral type things as well. And one of the key opportunities we have is we're announcing on June 1 a consumer direct program. We're going to sell directly through the Web, but we're doing it in a very interesting way that are going to involve a lot of our specialty retailers. They're going to be able to ship product if they have it in inventory. So we're working with them if they have it. And again, if we can create new customers for them, it's powerful. We've always felt strongly that we wanted to create a full-brand experience for people in the running category and the Web program and this advertising campaign is part of it. It's more than just an advertising campaign. We carry it into the field at all the events as well. So growth. What's exciting about where we're at. We're in mile 5 of a 26 mile marathon, the third inning, the first period, and we've got a long way to grow with our current strategy. We had a great first quarter. We were up over 30 percent. Our bookings through 9/30 of this year are up 32 percent. We have a lot of momentum right now. So the strategies that we're staying focused on are really about developing a leadership position in this niche. That's the key. We'd rather be strong in something than mediocre in a lot of things. So further specialty store shelf penetration in both footwear and apparel. That's something we're very focused on and this Internet tie-in is part of that along with product focus for those retailers. Additional market share gains from franchise product. I can't emphasize enough. If we grow dramatically, we're going to grow dramatically in our key shoes. The Adrenaline GTS is our number one selling shoe. It's a $90 stability shoe. It competes with New Balance, Asics, Nike, etc at that price point. This shoe has been growing dramatically for us. We think this shoe has got a long way to go. In many respects, we're not waiting to invent in hot, new product. We just need to develop more loyal customers around this product and continue to improve it so that runners find it and buy it again and again and again. Strategic expansion into service related retailers, including general sporting goods and athletic specialty, department stores and the Internet. We're there right now. We're developing programs with Nordstrom's. We're developing programs with Sports Chalet, Chick's, The Sports Authority, and Dick's. We're developing programs with The Finish Line. And we're having success with those. So we're not across the chain in the big ones. We are in Sports Chalet and Chick's, of course. We're starting in their best-performance running stores, not to be confused with their more urban fashion oriented locations. They know what those are, and we know what those are. So we're creating success in those stores first, and that's been the plan. And then continued international growth. The story in the renaissance of Brook's in the U.S. is happening all over the world. This strategy is essentially driving our growth all over the world from Australia to Canada. Over the last three years, we've bought our distributors out in Germany and the U.K., and we're seeing tremendous growth in Europe. We're working with agents in most of the other European countries, but we have our own base there in terms of sales and marketing operations. It's been tremendous for our growth. And the running phenomenon and the walking phenomenon is not a U. S. phenomenon, it is a global trend. Running is happening all over the world where people can afford to buy shoes. So we're benefiting from that growth as well. So we feel very, very strong about our potential to continue to grow our business. The goal is to transform ourselves from a company with good product and service to the (leading authority) on the running experience. We really believe because we're so focused on that that we can achieve that, and if we do achieve that, we've got opportunities to grow this brand for the next 20 years plus.