SAN FRANCISCO CHRONICLE Sunday, July 7, 2002

Climbing Back:  After financial missteps threatened its survival, the North Face has pulled away from the brink

Two years ago, the North Face was world famous but endangered. Its trek back to profitability -- achieved during the past 12 months under a new corporate parent -- has led to the revival of one of the United States' best- known outdoors brands.

In an industry that caters to the adventurer's taste for near-death experiences, the North Face got its own look at the edge and lived to tell the tale.

Still, at a time when makers of outdoors gear and sportswear are facing increased competition and worry about the aging of loyal Baby Boomer customers, the transformation of North Face probably isn't complete.

After all, the company -- with $250 million in annual sales, as reported by its corporate parent -- is one player in an industry that's exerting extra effort to keep up with ever-changing fashion trends and attract new, younger customers.

The North Face's recent resuscitation has impressed many in the industry. "The fact that they're even alive is a miracle," said retail consultant Helen Bulwik, principal at Oakland's Seagate International.

The next question, she said, is how to develop and market a highly recognizable brand name now operated under the umbrella of global apparel giant VF Corp., the $5.5 billion Greensboro, N.C., parent of Lee and Wrangler jeans, BestForm bras, and Eastpak and JanSport backpacks.

The North Face's initial tasks after VF acquired it in April 2000 included fixing ailing production and delivery systems, said Mike Egeck, 43, North Face's president since August 2000. "Retailers were really upset with the brand," he said. "Fifty percent of orders were bad. Others were late."

According to Egeck, the company has pared back its product assortment, reined in inventories and tried to re-establish lost profit margins.

Before VF Corp. took over and then hired Egeck from $780 million-per-year North Face rival Columbia Sportswear Co. of Portland, Ore., the North Face had accumulated excess inventory and resorted to selling much of it at discount outlets, a profit-killing move.

At the time of the acquisition, the North Face had 14 branded discount outlets, in addition to eight full-price North Face retail stores. The company plans to open more full-price North Face retail stores, in addition to one that opened this year in Beverly Hills. Meanwhile, it wants to reduce the inventory that flows through its discount outlets. During the past two years, the North Face has closed three discount outlets; it says it will close another this year.

''Outlet stores are not strategic for us. They're there for excess inventory," Egeck said.

Another change afoot at North Face is an increase in less-expensive casuals in the apparel lineup -- evidence of an effort to appeal to a more mainstream audience and thereby expand the company's following, particularly among women.

"All of those areas are opportunities to provide incremental growth," which the North Face is now in the position to pursue, VF Corp. spokeswoman Cindy Knoebel said. "During the first year, the objective was not growth. . . . The objective was to fix the issues we had, specifically related to shipping products on time and fixing (sourcing) problems. We wanted to try to stem the red ink and get the confidence of our retail customers back."

Retail analysts point out that when a company grows as large as VF Corp., opportunities to increase sales become more scarce. However, one way to grow is to acquire a high-end niche brand such as North Face and try to strike a balance between attracting more mainstream customers to the brand while also keeping its high-end, extreme-sports customers satisfied.

"I think that's actually a smart move," said Wells Fargo Securities retail analyst Jennifer Black, who has tracked Columbia Sportswear's successful expansion of both its less-expensive and high-end jackets, hiking boots and fishing apparel. The same could work for the North Face if it's careful, she said. "They're keeping that top-tier product as the aspirational part of the brand and then adding that next tier down, whether sportswear or footwear, that's not as expensive."

North Face's goal is to increase annual sales by low-teens percentages, Egeck said. At the same time it is putting out more casual sportswear, he said the company is increasing its investment in high-tech fabrics such as Gore-Tex and into high-end outerwear and equipment designs.

Meanwhile, the North Face this year is expanding its footwear lines -- adding more options in stalwart mountain-ready shoes as well as in casual sports sandals. It is also delving into weekend-casual sportswear with a selection of men's and women's cotton shorts, pants and tops called A5.

The new casuals represent a noteworthy departure from the company's more technical, synthetic fabrics. They also signify the broadening of product- development efforts that produced the North Face's MET5 vest and jacket -- self-warming fleece outerwear powered by small battery packs and designed for hard-core climbers, skiers and other athletes braving extreme conditions.

The broader assortment -- ranging from a $1,000 goose-down-filled Himalayan suit to $30 casual separates -- will help North Face increase its revenue by double digits next year, Egeck said during a recent interview at the company's San Leandro headquarters.

Egeck rejected some detractors' criticisms that the North Face is trying to maintain its footing in the extreme-outdoors market as well as to be an apparel-and-accessory brand like Eddie Bauer, which is more focused on lifestyle than high-performance gear.

The North Face brand, based in San Leandro, has been synonymous for years with far-flung alpine adventures and -- on the milder side of the great outdoors -- family camping gear and skiwear.

It all began with a small mountaineering store in San Francisco's North Beach in 1966.

The company's fortunes zigzagged through the years. In 1994, after a management upheaval following the bankruptcy of the brand's parent company, it was sold to new investors. An initial public offering was held in 1996, and during the chaotic years of the mid- to late-1990s, company headquarters and product-development offices were moved from Berkeley to San Leandro to Colorado and back to San Leandro.

In the spring of 2000, after years of financial mismanagement, the company found itself rich in brand recognition but desperate for cash.

Retail experts thought the North Face had two choices: Hang it up or sell.

In April 2000, VF Corp. bought the company -- by then private again -- for a reported $150 million, including debt and transaction fees.

The move -- widely considered a smart one -- ushered VF Corp. into a high- end outdoors niche where it hadn't played before. Analysts say the North Face needed VF Corp.'s deep pockets to survive.

During the 12 months prior to the acquisition, the North Face said it lost $98 million on sales of $238 million as it grappled with serious distribution problems.

"What a mess it was when VF bought it. . . . Like in first aid, they had to stop the bleeding, start the breathing," said analyst Thomas J. Lewis with C.L. King & associates of Albany N.Y.

The North Face, Lewis said, seemed determined to alienate even the retailers who bent over backward to tolerate late deliveries of backpacks, jackets and tents -- all highly seasonal products with a limited shelf life at full price.

As a result, stores across the United States were unable to meet the demands of shoppers loyal to the North Face logo, which graced tents, Gore-Tex jackets and sleeping bags, Lewis and retailers said.

Those retailers include the Kent, Wash., company Recreational Equipment Inc. , which remains the North Face's biggest wholesale account, Egeck said. According to REI, North Face is one of its top 10 vendors by sales volume.

The relationship has had its rough spots. As recently as a year ago, "The deliveries were kind of feast and famine," said David Fieth, one of REI's 17 product managers, who is primarily focused on packs and travel gear.

It was remarkable to see North Face's resilience given its problems, Fieth said. REI never considered dropping North Face entirely, although it did scale back on orders.

"The consumer has loved the brand, regardless of whether they could deliver.

“In some consumers' minds, there is no replacement," Fieth said.

That was a common sentiment among retailers during the North Face's ups and downs. In recent years, more competitors have joined the mix.

Lombardi Sports, a 54-year-old store in San Francisco's Marina District with about $15 million in annual revenue, carried North Face products until about five years ago. "We used to be a big North Face retailer," said co-owner Ken Lombardi. "It's hard to make margin selling their product, though. And there are other manufacturers that make product that is just as good, if not better."

Those manufacturers, said Lombardi and his outdoor equipment buyer Kevin De Palmer, include several other California companies, such as Santa Rosa's Marmot Mountain Ltd., Berkeley's Mountain Hardware and Ventura's Patagonia Inc.

Lombardi said discounted North Face products at the company's two Bay Area outlet stores in San Francisco and Berkeley used to cut into his sales of the brand.

Jay Knick, co-owner of Sonoma Outfitters in Santa Rosa, also hasdropped the brand, partly because North Face, during its growth years in the 1990s, insisted that independent stores increase the space they were devoting to its products.

Knick didn't want to do that. "The stuff wasn't selling, because they had too many stores in the Bay Area," he said. "I just said, 'To heck with it. I'm not playing this any more.' I haven't looked back ever since."

As Egeck approaches his second-year anniversary on the job, his charge is to build on the innovation that has made the North Face ubiquitous in extreme locales such as Mount Everest -- "The whole appeal of our brand is the technical product," he said -- but also to put a new face forward that sees where potential company growth lies.

''We have products that are more expensive and less expensive," he said. "It has made us more accessible to more people."