Payless ShoeSource, Inc.

1956–2004

Founded: 1956 as Pay-Less National

Employees: 30,000

Sales: $2.78 billion (2003)

Stock Exchanges: New York

Ticker Symbol: PSS

NAIC: 448210 Shoe Stores; 454110 Electronic Shopping and Mail-Order Houses

Payless ShoeSource, Inc. is the largest footwear retailer in the United States. The company operates about 4,700 stores in all 50 states as well as Puerto Rico, Guam, Saipan, the U.S. Virgin Islands, Canada, Central America, the Caribbean, Ecuador, and Japan. It also sells footwear via the Internet at www.payless.com. Payless has built its success by offering a large selection of shoes at very low prices, most selling for less than $15 as of 2004. The company has been able to maintain its affordable prices by sticking exclusively to a self-service format, keeping a tight rein on cost structure, and insisting on efficient sourcing and inventory controls. Payless ShoeSource targets as its main customers women from 18 to 44 years of age with household incomes of less than $75,000, and it estimates that in any given year, 40 percent of the women in this target group buy at least one pair of footwear at a Payless store. Payless was acquired by the May Department Stores Company in 1979. The company remained a May subsidiary until 1996, when it was spun off to May shareholders as an independent, publicly traded firm.

Company Origins in the 1950s

Employees: 30,000 Sales: $2.78 billion (2003) Stock Exchanges: New York Ticker Symbol: PSS NAIC: 448210 Shoe Stores; 454110 Electronic Shopping and Mail-Order Houses Payless ShoeSource, Inc.

1956–1979

Payless ShoeSource was founded as Pay-Less National in Topeka, Kansas, in 1956 by two cousins, Louis and Shaol Pozez. Three Pay-Less stores were opened in Topeka within a year of the company's founding. The company then expanded into Oklahoma, Texas, and Nebraska, opening 12 new outlets by the end of the decade. From the start, Payless stores were designed to maintain low prices by keeping overhead to a minimum. The first outlets were located in former supermarkets with the original fixtures replaced by simple, unpainted, wooden shelving, constructed in large part by store managers. The self-service format of the stores allowed Payless to limit staff, which usually consisted only of a manager and one or two clerks. This no-frills approach to operations kept the average price for a pair of shoes at the original Payless stores below $3.00.

Payless was not alone in offering budget footwear in a self-service format to American consumers. The self-service shoe industry emerged soon after World War II when cheap imported shoes began to be available on a widespread basis. Growth was fueled by changes in fashion that emphasized a looser fitting, more casual shoe as well as more variety in footwear. The 1950s baby boom also contributed to the rise in large discount shoe stores that catered primarily to middle-income families with children. Like most of these low-end shoe stores, Payless's major market was in women's and children's shoes, which constituted about 60 percent and 30 percent of sales, respectively. By the early 1960s, the $6 million sales rung up in Payless's 38 stores represented only a small fraction of the estimated $270 million volume of the self-service retail shoe industry.

Growth and Acquisitions in the 1960s

In the early 1960s, Pay-Less National, which had been operating retail stores under various names, including Pay-Less Self Service, National Self Service, Gambles Discount Shoes, and Shopper's City, changed its corporate name to "Volume Distributors" in order to reflect the company's diverse operations more closely. In 1962 Volume Distributors went public to raise capital for further growth. The influx of cash from the initial public offering allowed the company to open an average of 12 new stores annually in the early 1960s. In order to cope with the increased inventory, in 1966 Volume Distributors adopted a new computerized inventory system that used stock-keeping units (SKUs) to keep track of the large number of shoe styles and sizes stocked in the company's 50 stores. The new system was temporarily sidetracked when a tornado completely destroyed the company headquarters and warehouse in Topeka on the very evening that the first computer-generated inventory report was to be produced. Volume Distributors quickly picked up the pieces from this natural disaster and built new corporate offices at another location in Topeka.

In 1967 "Volume Distributors" was renamed "Volume Shoe Corporation" in order to identify it more closely with the footwear industry. In the same year the company launched an accelerated expansion program that saw the number of stores top 100 and annual sales rise to more than $10 million by the end of the decade. In addition to new store openings in the late 1960s and early 1970s, Volume Shoe implemented a program of acquisitions to further accelerate growth. From 1968 through 1973 Volume Shoe purchased eight smaller retail shoe companies, adding a total of 145 stores to the growing chain. The prosperity of the company during the inflation-plagued early 1970s actually led to a conflict with the Nixon administration in 1971 when Volume Shoe raised its dividend in spite of a government imposed wage-price freeze. Company President Louis Pozez was summoned to Washington to justify the dividend hike in a meeting with the President's "Cost of Living Council," but ultimately no further action was taken against the firm.

Accelerated Expansion in the 1970s

The rate of new store openings continued to accelerate through the mid-1970s. By 1975 Volume Shoe was operating 486 retail units in 31 states with total net sales of almost $75 million, making it the largest chain of family shoe stores in the United States. The Payless ShoeSource name was adopted in 1978 for the bulk of Volume Shoe retail outlets and the company logo was changed to the now familiar yellow, orange, and brown. The success of Volume Shoe and its Payless ShoeSource outlets was due in part to the company's skill at choosing locations for its stores. Although early stores were primarily freestanding, in the late 1970s Payless outlets also opened in major malls across the country. By 1979, 40 percent of all Payless stores were mall-based. The distribution of Payless units in a variety of real estate locales, including suburban strip developments, central business districts, shopping centers, and shopping malls, promoted the visibility and consumer recognition of the bold yellow logo as well as increasing the range of customers who would feel comfortable shopping at Payless stores.

From the start, Payless's relationship with its suppliers was key to the company's success. In the early years, the company bought their shoes "off the shelf" from American as well as foreign manufacturers, protecting themselves from shortages and sudden price increases by using a large number of suppliers. In the early 1960s no single manufacturer supplied more than 6 percent of Payless's merchandise. By the mid-1960s Payless was having shoes made to their own specifications to ensure that the shoe styles available in their stores matched the expectations of increasingly demanding consumers. These company-specific shoe styles would eventually evolve into private-label brands that would become the staple of Payless ShoeSource outlets from the mid-1970s. The development of in-house brands allowed Payless to maintain tight control over style and quality, the two issues that had driven customers away from many discount chains in the 1970s.

1979–1996

The May Department Stores Era: 1979-96

In 1979 Volume Shoe, with its 739 Payless ShoeSource stores generating annual sales of $191 million, was acquired by the May Department Stores Company in a $160 million stock swap. May was one of the leading retailers in the United States, with annual sales near $3 billion. The retail giant owned 11 department and discount store chains, but Volume Shoe was May's first entry into the discount shoe business. Volume Shoe was considered an excellent acquisition by analysts. The self-service shoe chain was earning operating profits of $28 million or almost 15 percent of sales, one of the best performances in the retail sector. May's capital allowed the Payless chain to expand at an accelerated pace and by 1981 there were 1,089 Payless outlets in 34 states. More than half of these stores were located in the Sunbelt states, where an influx of population was creating record retail growth. In the early 1980s, the Payless chain included 246 outlets in Texas and California alone. In 1983 Payless's presence in California was further strengthened by the acquisition of 66 Koby Shoe Stores, a California-based chain formerly owned by Kobacker Co.

To accommodate the growing number of Payless stores, Volume Shoe constructed a new 300,000-square-foot distribution center in Topeka. The new center, which would be expanded twice over the course of the following decade, became the heart of the Payless network of stores as its computerized inventory and picking system ensured the delivery of the 20,000 pairs of shoes sold annually by the average Payless store in the early 1980s. With changes in the worldwide economy, Volume Shoe began to rely more heavily on Asian manufacturers to supply these shoes and in 1983 the company opened an international office in Taipei, Taiwan, to coordinate overseas production. By the beginning of the next decade, factories in China were producing 80 percent of Payless's merchandise and the Taipei office became the center of the company's sourcing subsidiary, Payless ShoeSource International.

Louis and Shaol Pozez stayed on to facilitate the transition to the new ownership but retired in the early 1980s to be succeeded by former Executive Vice-President Harry Berger. In 1985 Berger was in turn replaced as president by Richard Jolosky, who ran the company through 1988. After an eight-year hiatus Jolosky returned to Payless as president in 1996. Jolosky's distinctive management style, which on one memorable occasion included dressing up as General Patton to rally the sales troops, was instrumental in the development of the aggressive competitiveness that marked Payless's approach to business through the 1980s and 1990s. Jolosky had spent a number of years as a senior vice-president of Wal-Mart Stores, Inc., the giant discount chain that dominated the industry in the 1980s and 1990s, and said that he learned a lot from founder Sam Walton. "When I visited stores with Sam, he never looked to see the things that we were doing better than the competition," Jolosky recalled in a 1996 interview with Forbes. "He always looked for the things that the competition was doing better than us." As president of Payless, Jolosky turned this lesson against Wal-Mart as he made certain that Payless always remained competitive in both price and product with the huge discounter.

May continued the vigorous expansion of the Payless ShoeSource chain through the late 1980s and early 1990s, opening about 200 new stores each year. With almost all of these stores now known under the Payless name, in 1991 the corporate name also was changed from Volume Shoe to Payless ShoeSource. During the early 1990s, Payless also introduced Payless Kids stores, which were added adjacent to existing Payless ShoeSource outlets. In 1985 there were 1,662 Payless stores. By 1991 this number had almost doubled to 3,295. Sales during the same period rose from near $700 million to $1.5 billion.

Although Payless's earnings also increased through the late 1980s, return on sales failed to keep pace with the company's earlier performance or with May's core department store holdings. Earnings as a percentage of sales had been about 15 percent when May purchased Volume Shoe, but flat sales in the discount shoe sector saw this figure fall to about 11 percent in the late 1980s and then tumble again to less than 8 percent in 1995. Growing competition from giant discount chains such as Wal-Mart and Kmart as well as an overall decline in the off-price apparel market contributed to this downturn. In addition, the consolidation and conversion of 679 shoe stores acquired from Kobacker Co. and Shoe Works Inc. in 1994 added substantially to operating costs. Payless, whose contribution to May's overall sales shrank from 20 to 14 percent from 1993 to 1996, was no longer considered a key part of May's long-term strategy for growth, and in 1996 May spun off Payless ShoeSource to shareholders.

Newly Independent and Growing in the Late 1990s

As Payless ShoeSource embarked on its new life as an independent publicly traded company, the company operated 4,270 stores, including 775 Payless Kids outlets. Plans were quickly implemented to close or relocate about 500 of the less profitable locations and to continue opening new stores. Among the new store openings in 1996 were the first Payless outlets in Alaska, giving the company a presence in all 50 states. Leading the firm post-May was Steven J. Douglass as chairman and CEO and Jolosky as president. Douglass was a longtime May veteran who joined Payless in 1993 and was named CEO in 1995.

1995–2004

The late 1990s saw Payless aggressively seek growth on numerous fronts. In 1997 the company went up-market by acquiring Parade of Shoes from J. Baker, Inc. Parade of Shoes was a struggling chain selling mid-priced footwear at 186 shoe stores in 14 states. Revenues in 1995 totaled $113 million. Payless set up Parade as a separate division, maintaining its existing sourcing, distribution, systems, real estate, and financial organizations. Having blanketed the United States with Payless outlets, the company next sought growth in foreign markets. In October 1997 the first Canadian Payless stores opened in the Toronto area. Buoyed by their initial success, the company stepped up plans for further openings and by the end of 1999 had 180 stores in Canada.

Early in 1999 Ken C. Hicks was named president of Payless ShoeSource, having most recently served as executive vice-president of Home Shopping Network, Inc., the Florida-based electronic retailer. Jolosky was appointed vice-chairman. He retained a seat on the board of directors and focused his attention on product development and Parade of Shoes. Meantime, the company ventured into e-commerce in 1999 by offering shoes for sale at its payless.com web site. In another growth initiative Payless entered into a joint venture with ShopKo Stores Inc., a discount retailer based in Green Bay, Wisconsin. Payless began operating shoe departments inside ShopKo stores under the Payless ShoeSource name. After the first such stores-within-a-store opened successfully in the later months of 1999, the entire 160-unit ShopKo chain was outfitted by the end of 2000. For the fiscal year ending in January 2000, Payless posted strong results: $136.5 million in net income on revenues of $2.73 billion. By this time the company was operating nearly 4,500 Payless ShoeSource stores and more than 220 Parade of Shoes stores.

Struggling in the Early 2000s

As it was opening 56 more stores in Canada in 2000, bringing the total to 236, Payless began looking south for additional growth. In September 2000 the company entered into a joint venture with local partners to operate Payless ShoeSource stores in the Central American region, specifically Costa Rica, Guatemala, El Salvador, the Dominican Republic, Honduras, Nicaragua, Panama, and Trinidad and Tobago. By January 2004 there were 150 Payless stores in the region. Next, a similar joint venture was created in November 2001 to pursue the South American market. This venture was operating 57 Payless stores in Ecuador, Chile, and Peru by January 2004. In 2003 Payless joined with the Japanese trading company Nichimen Corporation in another venture, which opened a test store in Japan in November 2004.

As the early years of the new century began to unfold, Payless was under increasing competitive pressure, in a brutal retail environment, from several challengers: discount chains, most notably Wal-Mart and Target Corporation; department stores, particularly the surging Kohl's Corporation; and specialty chains, such as Foot Locker and Shoe Carnival. The fairly steady rise in both profits and revenues of the late 1990s came to a halt. Another problem area was Parade of Shoes, which was posting disappointing profits. This and other concerns prompted a restructuring in the fourth quarter of the fiscal year ending in January 2002. Payless closed 104 underperforming stores (67 Parade units and 37 Payless ShoeSource outlets), cut 230 positions from the payroll, and took a $43 million after-tax restructuring charge. The operations of Parade also were consolidated with those of the flagship chain. For the year, Payless's earnings plummeted 62.3 percent to $45.4 million, while sales fell 1.2 percent to $2.91 billion. A longtime Payless veteran, Duane Cantrell, was named president in February 2002.

From 2001 to 2003, not only did net sales fall each year, but same-store sales (sales at stores open at least one year) fell each year as well. Payless furthermore suffered a net loss of $100,000 in 2003, and at its annual meeting in May 2004 it had to fight off a challenge from a dissident group of shareholders aiming to gain three seats on the company board. Having already committed to closing or relocating 230 Payless stores during 2004, the company announced a major overhaul in August of that year. The plan, expected to cost about $75 million, included closing down the 181-unit Parade chain, shutting down an additional 260 Payless ShoeStore outlets, exiting the Peruvian and Chilean markets, reducing certain wholesale businesses, and cutting expenses. The moves were intended to enable Payless to heighten its focus on a stronger core operation, though some analysts believed that they were insufficient to revive the struggling firm. By the end of 2004 Payless was operating a little more than 4,700 stores, compared with its peak total of about 5,100. Late in 2004 Cantrell resigned as president, and Payless announced that it was reviewing its agency account relationship for its North American advertising. It also reported that through December, same-store sales for the year were down 0.8 percent.