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Spring 2004 Heads Up

For two guys on the verge of their biggest Christmas season ever, Scott Molander and Glenn Campbell, founders of Hat World, Inc., were remarkably calm. “I don’t really have any problems right now,” says Molander the day before Thanksgiving, less than 48 hours before the start of the Black Friday buying frenzy. With the matter-of-fact tone of someone ticking off a shopping list, Molander says, “I opened three stores today, but really I’m working on [finding] locations for next year.” Three store openings in one day might give lesser beings heart palpitations, but for Molander, it’s just another day at the office. Campbell says “the Hat World machine is pretty fine-tuned right now. We’re not complacent because we can always get better… but in terms of our business, our kitchen’s pretty clean right now.”

Head start

At Hat World headquarters in Indianapolis and at each of its stores across the country, the proverbial ducks are in a row. The company’s product: officially licensed baseball-style caps from colleges, MLB, the NBA, the NFL, the NHL, and auto-racing organizations. The company’s street names: Hat World, Lids, Hat Zone and Cap Factory. The caps represent 94 percent of their stock, the rest is accessories and apparel, and all of it’s stocked with care. Now it’s just a matter of front-line salespeople (with support from the back office) and enthusiastic consumers spreading the Hat World word.

Of course, things weren’t always so straightforward. When Campbell and Molander opened their first store on November 3, 1995, they weren’t sure what was going to happen. They had borrowed $100,000 from a group of private investors, spent 80 to 90 percent of it on inventory, and stocked a 1,000-s/f temporary store in the Tippicanoe Mall in Lafayette, Indiana. Just finding a mall that would lease them space was an uphill climb. A half-dozen property managers rejected the concept, mainly because they thought the product line was too narrow to support an entire store. When the partners pointed to the mall’s cookie store and soap store, the answer was still “No.” In the end, they had to travel almost an hour from Indianapolis, where they lived, to find a mall that would sign them.

A Simon mall manager recognized the concept’s potential and gave them their first shot for the eight-week 1995 Christmas season. Molander and Campbell sold 6,000 caps, taking in $108,000 in sales. Things were looking up. “After [management] saw what we did for Christmas, they said, ‘We’d like to make you permanent here in Lafayette, and we’d like to do a couple more temporary stores with you in Muncie [45 minutes east of Indianapolis] and in Champaign, Illinois.’ So we did that,” says Campbell. “By the end of 1996 we ended up having five full stores.”

The lid is on

imageBy 2000, Molander and Campbell had built their enterprise into a thriving chain of more than 100 stores. And then a funny thing happened. Lids Corp., their biggest competitor, approached Hat World to discuss joining forces. With more than 400 stores and growing at breakneck speed, Lids Corp. was already the world’s largest headwear retailer. A merger would corner the cap market from coast to coast. But Molander and Campbell had concerns about Lids’ profitability and wondered if Lids had grown too big too fast. “I think Lids opened their 100th store the day we opened our fifth,” says Molander. “They were trying to build a train that would get them to an IPO or opening 1,200 stores or something like that when they only had 400… They were all caught up in the dot-com/IPO mania.”

Molander and Campbell couldn’t convince themselves that Lids’ iffy balance sheet wouldn’t drag down Hat World’s solid financials. “Pull old Dun and Bradstreet [reports] and see that they always lost money,” Molander says. So they turned Lids down. Sure enough, Lids filed for Chapter 11 about a year later. “We saw it coming and knew why they went under,” says Molander: the Lids goal was to grow very fast, whereas Hat World chose to maintain a slower, more manageable pace.

The two companies also had different philosophies on profitability. “Lids started out with a lot of money and probably always had their eyes on an IPO,” leading Campbell and Molander to believe that Lids considered it more important to grow than turn a profit. Hat World operated on the opposite view: profit is paramount. “Lids never made money in the eight years they were in business,” Campbell says, whereas Hat World “actually made money every single year we were in business.” The Lids Corp. bankruptcy “almost gave validity to what we were doing, the way we were running our business.”

When your biggest competitor goes bankrupt, it’s time to sit back and watch their customers come to your door, right? Not for Campbell and Molander. They went on the prowl.

With the help of Bob Dennis and Jim Harris, two savvy executives they later hired as CEO and president, Hat World purchased Lids’ assets for $16.5 million. By the time the deal was done, Hat World owned more than 260 Lids stores (Lids had already closed about 100 stores). Later, Hat World did some cherry-picking of its own, keeping the Lids stores with the highest profit potential.

“On April 13, 2001, we woke up with 423 stores, and it was different,” says Molander. “When we took over Lids, I’d say it was a 50-50 shot,” Campbell says, and “sometimes you’d wake up nights in a cold sweat.” It was only when the Christmas numbers started filtering in, “when we had comp gains in November, that we started to feel better,” Molander says. With some excitement, Campbell adds that they’re “now in our 25th straight month of comp gains.”

That’s despite more than their fair share of problems during the buyout. First, in addition to hundreds of new employees, dozens of inherited Lids stores were spottily stocked, creating a bad impression in the marketplace and bringing complaints from some mall managers. Second, the inventory left in those stores wasn’t the best (“and that’s a nice way to put it,” the two say in unison). Third, employee motivation at Lids was at an all-time low. Finally and perhaps most important, Hat World now had to deal with merging two back-room and POS systems. All at the same time.

“We had to try to keep all of the [Lids] people, make them stay with us and believe in what we were doing,” says Campbell. “Product-wise, all of the [Lids] vendors had shut them off, so we spent the first six months trying to do all we could to just get some product in the stores… then we had to move everything from Boston to Indianapolis,” including Lids’ corporate headquarters plus two warehouses.

The transition was tough. In fact, the two put off integrating the back-room and POS systems for more than a year so they could focus on more pressing matters—product, personnel and sales. And so they coped with two warehouses (one in Boston, one in Indianapolis) for months, and two ordering and reporting systems. Needless to say, it was difficult to get routine financial status reports on all 400-plus Hat World stores during that time. “It was a pretty tough 15 months,” Campbell says. (Now that things are calmer, Campbell and Molander are integrating the two companies in another way: as Hat World leases come up for renewal or stores are relocated, the company is switching the name to Lids.)

By Christmas 2002, all of the Lids front- and back-end systems had been integrated into the expanded and upgraded Hat World system. And the holiday season was a success: 2002 ended with more than $155 million in sales, thanks in part to the purchase of 13 Hat Zone stores that November (eight are franchisee-owned). Compared to buying a 400-store bankrupt company, the Hat Zone purchase was a piece of cake. “We understood everything that needed to be done,” Molander says. “We knew—boom!—you integrate them like this, here’s the plan, here’s the way we want our merchandising package.” It was no surprise, then, that Hat World bought Cap Factory the following spring, a small company with two year-round kiosks. “Those won’t be the last two acquisitions,” Campbell says. Not only that, but Hat World plans to lead the pack in innovation.

Road trip!

imageOne of those innovations is “Lids on the Road.” the 44′ mobile retail trailer that travels to high-profile, high-traffic events such as the NCAA Final Four, the College World Series, the X-Games, and MTV’s Spring Break to sell headwear, accessories and apparel. Molander says they expect to have sold “probably between 40 [thousand] and 50,000 hats” for 2003, and expanding Lids on the Road will be a major push for 2004.

Another focus is a world away: an expansion is already underway in South Korea, where four Hat World stores opened under a licensing agreement with two South Koreans who want to open 75 stores in five years. Campbell and Molander couldn’t be happier. “[They've] done a really nice job” says Campbell. “You can’t tell the difference between their stores and ours.” A South Korea flagship store is set to open in early 2004, and a Korean website is in the works.

In the meantime, Hat World’s own websites are doing well (the company doesn’t release earnings figures). Company-wide sales for 2003 are estimated at “between $180 million and $200 million,” says Campbell. That includes more than a dozen Hat Zone in-line stores, two Cap Factory kiosks, more than 150 Hat World stores and 300 Lids stores, 11 of which are in airports.

“We want to do about 60 airports, and we’ve got about 100 malls left to go, but the big push for us is going to be street stores,” Campbell says. “We’re close to a deal on 42nd St. in New York… and we opened a store on the corner of Canal and Bourbon in New Orleans—our first real street store—that’s doing well. We’ll do a dozen [street] locations in New York in the next 18 to 24 months, hopefully. You have to be patient to get the right location.”

Another 500 locations in the next five years is not at all out of the question. “We’re not even in the top 10 airports yet, and there are a couple dozen malls that we could have two stores in,” says Molander, pointing out that they have five stores in the Mall of America. Their strategy must be working: overall, their mall locations earn an average of $600/sq. ft. compared to a $369 overall average for the malls they’re in.

What’s been called Hat World’s “meteoric” rise hasn’t escaped the notice of business magazines and organizations, which bestowed a number of awards on Hat World in the last few years. They were Ernst & Young’s “Indiana Heartland Entrepreneurs of the Year” in 1999 and 2002, and on Inc. magazine’s “Inc. 500″ list for 2001 and 2002. And last year, the company made the “Indiana Growth 100″ list, which recognizes “high-potential, high-growth companies,” for the sixth straight year.

“The awards validate what we’ve done,” Campbell says, especially since they recognize the contribution their 2,000 employees make every day. Says Molander: “The awards help our employees because it recognizes that it’s all about them. If it weren’t for our employees, our idea would have been a dream on a napkin in a bar somewhere.”

But true to their bottom-line philosophy, when it comes to securing capital or a critical location, sales and profits are what really matter. “[Investors and malls] look at our numbers—at our sales and profitability—and that’s what ‘sells’ our stores.” For two partners who started with a plan, an idea, and a lot of trouble “selling” that first store, Hat World’s sales and profitability are heading ever higher.


Nancy Tanker

Nancy Tanker is the former managing editor of Specialty Retail Report. She has covered the specialty retail industry for nearly 15 years for a variety of publications and can be reached at srrtanker@mchsi.com.

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