As managing director at Schuh, Colin Temple’s firm grip on the retailer has enabled it to sneak under the radar and establish itself as one of footwear’s few recent success stories
“We’re just total money-grabbers,” jokes Schuh managing director Colin Temple as he whips through the retailer’s warehouse in Livingston, Scotland. He points out shoe repair machines that are used to rescue faulty returns and failed Sale stock destined for eBay, where a discoloured black peep-toe heel will fetch between £30 and £40 – “higher than the Sale price”, according to Temple.
This penny-pinching attention to detail, along with Schuh’s reputation as the “nicest operator in footwear”, has helped the retailer emerge as one of the few success stories in the specialist footwear sector of late. Clarks finally wound up its Ravel fascia last year, Dolcis went into administration last month and Stead & Simpson is limping through a rather desperate sale process just 12 months after an emergency refinancing. By contrast, Schuh’s EBITDA for the year ending April 2008 will hit £11.75 million.
Figures due at Companies House as Drapers went to press will show the business captured sales of £106.8m for the year to April 2007, with EBITDA at £9.9m. That is a very respectable 9.3% ratio in horrendous market conditions, which puts it ahead of City darling Kurt Geiger’s most recent numbers and well beyond Office’s profit ratio of about 6.4%.
“We have been perceived as just ticking away in the background, but we’re actually not a bad retailer. Neil Clifford [chief executive] at Kurt Geiger is charismatic when it comes to the press, but we are at least on a par as a business, if not better. OK, we’re not putting Prada into European capital cities, but we are doing other things such as pioneering online,” says Temple, who nearly four years on from his management buyout is finally ready for some “media glamour”.
Schuh’s performance over the past two years is even more impressive given that the footwear retailer’s offer is dominated by brands that offer paper-thin margins – the footwear industry average, including sports, is around 2.3, while their rivals’ own-brand margins hover between 3 and 4. Schuh’s offer is made up of more than 100 brands and there are 3,000 SKUs in the business at any one time. Men’s footwear makes up 45% of sales – an unusually high percentage for a unisex business – and of those about 60% of sales come from sports styles, which often work on even tighter margins. The sports market itself is a highly competitive territory in which to be.
Schuh’s biggest store, its London Oxford Street flagship, turns over £8m and carries a maximum of 2,000 SKUs at any one time. The breadth of offer is one of Schuh’s strengths and sales densities run at about £1,200 per square foot across the chain, which is above the industry average.
However, Temple admits that own brand has been more difficult, falling back from 22% of total sales to about 15% in the past two years.
This has contributed to declining pre-tax profits, which have fallen to £6.6m for the 52 weeks to March 25 against £9m just before Schuh’s 2004 management buyout.
“New Look and Primark have whipped the turnover from under the specialists over the past five years. But the fallout is levelling off now,” says Temple.
The Red or Dead licence granted by brand house Pentland gives the business scope to pull back own label, according to Temple, and Schuh will trial its first Red or Dead men’s line this year. Temple says: “Aside from the licensing fee, we can command a branded price premium on Red or Dead.”
He attributes Schuh’s strong performance to his “three Ps” philosophy, which encompasses the product strategy.
“It’s people, product and processes,” says Temple. “I’ve not yet sussed out whether the staff or the customers are more important, but I know people are vital to retail. Our stores are flexible to serve the product and our processes are as efficient as possible. We leverage technology to our advantage to get the stock flow going.”
Schuh’s development of back-office systems is phenomenal. Its IT department employs 13 dedicated programmers and support staff – “at great expense” – who help develop a network of complex systems which talk to each other and to Schuh’s advanced stock control system, Shark, which was developed in-house nine years ago.
These systems are the lifeblood of the business, and the reason Schuh can thrive even when 85% of sales come from low-margin brands. Shark monitors sales in real time and automatically redistributes stock around the portfolio to maximise sales.
Temple explains: “We have a ‘best store best stock’ philosophy. We take lines from lower-performing stores and move them into stores where the line is selling best. It’s like blood pumping around the body. This means it is feasible that we could take a store’s best-selling shoe away from it and put it into a store that is selling it even better. It’s very alien to external people but it works for us and we can build ranges around local markets. Retailers such as Faith have pastry-cutter stores where the shops are the same size and the collections are the same everywhere.”
For most retailers, shifting stock back and forth via the warehouse would be a logistical and operational nightmare, not to mention a costly venture, but Temple says that Schuh’s IT systems make it viable and worthwhile.
“It costs me about 50p to move a pair. We’re only going to move them once or twice in their lifetime, and if you compare that to having to markdown a £50 shoe to £35 to clear it then it’s a big difference.”
Shark also helps to identify low-stock slow-selling lines to eject from stores and bring back to the warehouse to be put onto eBay. Schuh was the UK’s largest eBay retailer in 2007 based on the number of transactions, and sells a couple of thousand pairs of shoes a week via the auction website. The retailer simplified the process of uploading footwear onto eBay by building an IT system that links through to its existing stock management programme, making it a viable sales channel for a multiple retailer dealing in large volumes.
Schuh also operates Schuh.co.uk and sells via shoe-shop.com, run by fellow footwear chain Pavers managing director Stuart Paver, as well as through N Brown’s dedicated footwear site Vivaladiva.co.uk and Amazon.com’s new dedicated footwear channel.
Temple says it is better to be part of these new web operations than to let them encroach on Schuh’s territory. He points to the aggressive online battle taking place in the US between Amazon.com, Zappos.com and Gap’s new Piperlime.com site, which he says is likely to transfer to the UK as soon as one of the US sites breaks into profit.
He adds: “It was better to join the new players and try it than just sit on the sidelines. Our systems make the file transfers very easy and it drives traffic to us so we only have the commission to pay.”
Schuh has also launched its first dedicated discount operation at www.branch309.co.uk, which means the retailer can take advantage of stock available in the market without damaging the Schuh brand. Branch 309 also has an eBay operation.
Temple and his team’s attention to detail ensured they escaped the clutches of private equity when they sought to buy out founder Sandy Alexander and Terry Racionzer in 2004, who had rejected an earlier offer for the business from entrepreneur Sir Tom Hunter.
Instead of chasing the big money roll-out deals seen at Faith and Office, the MBO team, which included finance director Mark Crutchley, retail operations director Tom Lynch and personnel director Lyn Ferguson, opted to fund the deal through a combination of cash and loan notes and retain 100% ownership themselves.
Temple says this is another reason why Schuh has thrived while rivals have crashed and burned. “I’m not going to sit here and sell you dreams about opening hundreds of stores. We open at a rate of three to four a year. We’re under no pressure to expand, while private equity-owned businesses have had expansion forced on them and this has caused a lot of their problems. If we open a store and it doesn’t work, we stop opening stores until we find out why.”
He adds: “I am a control freak and it was a conscious decision to keep full control of the company. I have responsibility for 2,000 staff and I have to think about that.”
The loan notes from Alexander and Racionzer expire in 2008, and Crutchley and Temple are in the process of finalising a refinancing package worth £30m, meaning the business is not loaded with the sort of high gearing that has come back to bite some private-equity owned retailers.
Temple says he has identified 50 potential sites that could support a Schuh store, but that he will continue to grow at a rate of around four openings annually.
“In five years we hope to have paid down a lot of the debt balanced with opening more stores,” he says. “At our rate of growth the business could be a third as big again with 65 to 70 stores by then. I hope pro-rata we will be more profitable, and I hope the footwear market will be pretty buoyant again.”