Buffett Track Record Boosts Brooks With Sneakers Surging

Thursday, 21 Feb 2013 01:36 PM

 

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When Warren Buffett fires the starting gun for the inaugural race at Berkshire Hathaway Inc.’s annual meeting in May, he won’t simply be searching for his fastest manager. The billionaire also will be spotlighting Brooks Sports, the event’s main sponsor and a Berkshire company.

While the sneaker maker has been part of Berkshire’s Fruit of the Loom since 2006, it caught Buffett’s attention about 18 months ago at a dinner party with investment manager Todd Combs, according to Brooks Chief Executive Officer Jim Weber. The conversation turned to running and Buffett, Berkshire’s 82-year-old chairman and CEO, was intrigued by excited chatter about Brooks sneakers.

“Apparently, he said, ‘I think they’re doing pretty well,’” Weber said in an interview at Bloomberg News headquarters in New York. “Then January of last year, Warren actually called and said, ‘Hey, we’ve been thinking about reorganizing some things around Fruit of the Loom’s business and it makes sense to me to spin you guys out,’” Weber said.

Now Weber reports to Buffett, who added a 5-kilometer (3.1 miles) race to Berkshire’s annual meeting weekend and agreed to put his likeness on a second collection of limited-edition sneakers for the event. While the brand’s sales are a fraction of those at behemoths such as Nike Inc. and Adidas AG, Brooks has doubled revenue in three years and is poised to exceed $500 million in sales this year. The sneaker maker also has scooped market share from Adidas’s Reebok brand and New Balance Athletic Shoe Inc. by targeting avid runners.

Consumer Passion

The brand meshes with Buffett’s passion for consumer companies. Though it has only been a running company for about a decade, Brooks has a strong niche and history. The company turns 100 next year, about 45 years younger than H.J. Heinz Co., which Berkshire and 3G Capital are acquiring for about $23 billion. Buffett started paying more attention to Brooks after the August 2011 dinner party, where Combs and Geico CEO Tony Nicely’s wife said they ran in the shoes.

Buffett has used stock picks and takeovers to build Omaha, Nebraska-based Berkshire into a company valued at more than $250 billion, with about 288,000 employees across its holdings. Yesterday, its Class A shares traded at $151,000.

The U.S. running-shoe business is a $7.5 billion market, up from $6 billion about 10 years ago, according to Charlotte, North Carolina-based researcher SportsOneSource. Marathons and half-marathons continue to be viewed as beacons of achievement, and growing health awareness has helped elevate the popularity of the easy-access sport.

Women Runners

At the same time, more women are running, partly because of the U.S. government’s Title IX, which since 1972 has required publicly funded schools to provide equal athletic opportunities for men and women.

Buffett didn’t respond to a request for comment sent to an assistant.

When Weber became CEO in 2001, he was Brooks’s fourth leader in about two years and the company was “basically bankrupt,” he said. At the time, the company was owned by private-equity firm J.H. Whitney & Co. Weber, who sat on the Brooks board, decided to aggressively focus the Bothell, Washington-based company on building top-flight shoes for avid runners. That meant shedding merchandise such as baseball cleats and basketball shoes, excelling at making technically sound sneakers while dropping less pricey lines and narrowing distribution to mostly specialty running stores. It was all part of an effort to gain clout with people running marathons or half-marathons.

Berkshire Family

Brooks entered the Berkshire family through a series of transactions. The sneaker maker was purchased by athletic company Russell Corp. for about $115 million at the end of 2004, and, two years later, Russell was in turn purchased by Berkshire’s Fruit of the Loom for nearly $600 million.

Brooks sponsors races, including the Rock ’n’ Roll Marathon series, and looks for grassroots publicity from running blogs, avoiding television campaigns even when promoting new products, Weber said.

There are about 15 races a year, including the Boston Marathon, in which the company performs what it calls “statistical shoe counts” -- tallies conducted every 10 seconds as runners stream past -- to see how Brooks stacks up with competitors. Last year, Brooks footwear sales increased 45 percent.

“To be truthful, it’s the only way to compete with Nike -- they do what they do so well,” Weber said, noting Brooks typically ranks in the top two at such races with Japan’s Asics Corp. “We do not have to be cool with a 17-year-old high school football player, and all the other brands do.”

Chasing Nike

Nike, with more than $24 billion in annual sales, dominates U.S. athletic footwear with its namesake brand claiming about 45 percent of market share last year, compared with 1.6 percent at Brooks, said Matt Powell, an analyst for SportsOneSource. Still, Brooks has boosted that from 0.8 percent in 2010, showing “tremendous growth,” helped by its 20 percent share at influential specialty running stores, he said in a telephone interview.

The only other brand that may rival Brooks is Under Armour Inc., though its running-shoe business hasn’t grown as quickly, Powell said. Plus, serious runners tend to become loyal to a shoe they’re logging 1,000 miles in, often sticking with the specific line or the brand overall.

“They’re really reaping the benefits today of laying the proper foundation here over the last decade,’” Powell said. “This is a great object lesson for the retail world on how to build a brand and sustain it.”

Brooks faces the challenge of expanding distribution while remaining true to its core customer and maintaining share in the specialty stores that tend to sell the sneakers at full price and give the brand credibility.

Proceed Cautiously

“They have to proceed very thoughtfully and cautiously in order to do that successfully,” Powell said.

Brooks, which is also growing in Europe, “easily” has the potential to become a $1.3 billion to $1.4 billion company, as running attracts more athletes worldwide and with the support of Berkshire, Weber said.

Berkshire’s annual meeting attracts thousands of investors from around the world and will take place the first weekend in May. Buffett said in a statement last month that the 5K will be “the perfect complement” to products from other Berkshire- backed companies, including See’s Candies and Dairy Queen Dilly Bars. A cartoon of Buffett breaking through a finish line will be on the insole of the limited-edition sneakers and cost $120.

Board Presentations

In October, Brooks was invited to join a handful of much bigger Berkshire companies, including auto insurer Geico, railroad Burlington Northern Santa Fe and utility MidAmerican Energy Holdings Co., for presentations to the corporation’s board. The brand was first broken out as a standalone company in Berkshire’s 2011 annual report.

It helps that Combs and fellow Berkshire investment manager Ted Weschler are both “Brooks guys,” Weber said.

“What makes Warren so unique from my perspective is the key metric for him is your brand better be stronger at the end of the year than at the beginning,” he said. “We’ve been on that path at Brooks, so it’s just really powerful for us as a company to have that kind of support.”


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