Shoe Pavilion Hits Stride With Ambitious Plans for Expansion

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Shoe Pavilion Inc. is on the move both geographically and financially.


The off-price footwear retailer recently packed up its headquarters in Pinole and moved to Sherman Oaks. It’s a change that comes as the company grows its store base more aggressively than ever in its nearly 30-year history


The early results are encouraging. The company’s fourth-quarter sales rose 19 percent to $29.5 million from $24.8 million a year ago. In addition, comparable stores sales at stores open over a year, a key measure in the retail industry, increased 5.5 percent in the quarter.


Those kinds of numbers have sent Shoe Pavilion’s stock up nearly $6 in a year. As of Jan. 25, the stock traded at $9.76, a 52-week high and two and a half times its price from one year earlier.


“It has had a great run since the beginning of December, but I still think there is upside,” said R.J. Hottovy, a senior research analyst with Next Generation Equity Research LLC. “They have shown in the past that they are capable of growing and still maintaining profitability.”


Shoe Pavilion, which opened nine stores last year and now has 90 locations, plans to add 15 to 20 stores annually. That’s compared to a net increase of fewer than 10 stores from 2002 to 2005.


The question is whether the company can pull off such an expansion. But given its track record it might well do so.


The company was dinged with annual losses only twice. The last time was 2003 when it posted a $2.9 million loss and same-store sales dipped 3.9 percent.


That year the company was saddled with excess inventory and was hit with a charge after a license agreement to operate 40 Gordmans Inc. shoe departments ended.


“That marriage did not work for us. Your destiny is being controlled by somebody else,” said Dmitry Beinus, Shoe Pavilion’s chief executive. “We want to develop our own brand. We want to become the leading big box retailer of off-price branded footwear.”


Beinus founded the company in 1979 with a traditional store named Shoe Inn in Renton, Wash. After seeing a Marshalls open a location nearby, he sensed that off-price footwear could gain a following and switched his concept.


Now, if positioned correctly, Shoe Pavilion has the ability to capitalize on a blazing market segment. According to NPD Fashionworld, off-price shoe retailing, at a 19 percent annual growth rate, is the fastest growing category in a $40 billion domestic footwear industry.


“Any time you are in the value shoe business, which is a very tough business, and you can deliver results like they have, you are doing OK,” said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a retail consultancy and investment-banking firm in New York. “There is going to come a point where Shoe Pavilion will have to bring itself to the next level.”


Shoe Pavilion is already making key adjustments to strengthen its position. The company is sticking with its bare bones marketing, which involved displaying its merchandise on cardboard boxes that hold its shoe inventory. However, newer stores are bigger than the average 8,500-square-foot existing stores, usually approaching 14,000 square feet.


The newer locations also are in prime power-center real estate, where foot traffic is heavy and complementary retailers attract customers searching for off-price merchandise. The roomier stores allow Shoe Pavilion to incorporate a greater variety such as children’s shoes and accessories.


Shoe Pavilion is cautious about adding stores in unfamiliar territories and goes first into states bordering those where it has considerable presence. After building a strong base in California, Oregon and Washington, Shoe Pavilion set up shop in Arizona and Nevada and is entering Texas and New Mexico this year.


Dallas will be a crucial test for Shoe Pavilion. There, the company will face significant head-on competition from its chief rival, DSW Inc., which is primarily concentrated in the Midwest and East Coast. With about 200 stores, DSW is larger than Shoe Pavilion and has been adding stores at a blistering rate.


The trick for Shoe Pavilion is to weather the expansion of DSW, which went public last year, as well as an onslaught of new entrants leaping at the chance to siphon off customers in a lucrative niche. Already, Davidowitz said TJX Cos. Inc., which founded off-price retailer TJ Maxx, is growing its shoe department, and he expects others to follow.

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