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Russ Berrie and Company, Inc. (RUS) |
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CEOCFO
Interview Index |
This is a printer friendly page! Russ Berrie and Company has the
history, products and business strategy to arrive and compete effectively in a marketplace
that is fragmented with no major competitors BIO: Mr. Gatto: “There
are a few things that attracted me to RUSS; first was its forty-year history and that the
brand has been so strong in the gift industry for so many years. This is a testimony to
the underpinnings of the business, which have been built on the quality of the product,
the integrity of the product and the people and the organization that have supported that
product over the years. It has been the tradition, culture and history of the brand.
Second, it is the positive nature of the industry in which the business operates. There
has been some erosion in the total number of independent gift retail outlets over the
course of the past few years, but at the consumer level, the amount being spent on gifts
continues to increase from year to year. From that point of view, it is a vibrant and
growing market and a positive environment in which to be working. The business is
appealing to me because within that market, there is no single dominant manufacturer or
marketer that has such a commanding share of the market that it provides a barrier to this
company from being very successful moving forward. I believe that any company that can
develop a product and an aggressive marketing plan in a fragmented business can thrive.
Because this company operated in a somewhat fragmented supply chain environment with
literally thousands of suppliers bringing merchandise to the retail community, we enjoy a
fertile environment for growth and ongoing prosperity. These are the reasons why I find
this business so appealing. Beyond that, certainly, the company’s balance sheet being
as strong as it is and its historical financial performance was another positive factor in
making the decision to come here.” Mr. Gatto: “The opportunity in the business is in owning a larger market share both within our traditional retail channels and within some of the channels in which we are not currently operating. I would like to grow RUSS’ share in its traditional independent gift channels and card and gift outlets around the world. Also, I would like to see the business develop new channels of distribution and follow the trend as the consumer enters new channels to find gift content. The business has done a respectable job in expanding geographically outside the North American markets. There is room for further growth outside the U.S. from a channel distribution perspective; and from a geographic perspective, there is an opportunity for this company to expand its horizon.” CEOCFOinterviews: Where else would you like to be geographically, and what do you need to do to get there? Mr. Gatto: “Certainly our presence in Europe, save for the U.K, offers great potential and opportunity. We have not penetrated any of the former eastern block countries at all. We have distributorships in certain parts of Asia that have either grown into bigger and better partnerships or established wholly-owned subsidiaries in certain other countries in Asia. And we have little or no presence in Mexico, Central or South America, offering us opportunities in some of the larger markets in this hemisphere as well.” CEOCFOinterviews: In terms of new channels of distribution, will you give us an example of where you would like to be or how you are going to get to there? Mr. Gatto: “I believe the company can have unique brand platforms that serve several different channels. There is certainly a very important core business within our existing group of customers. There is a great opportunity within the traditional gift operations, to grow into at least five or ten thousand traditional independently owned gift stores. There are advantages within the higher-end department stores and freestanding up-scale businesses that this company could cultivate. There is the mass market, the big box operators, where under a unique branding proposition, there is a significant opportunity for the company to grow. Beyond that, look at what has transpired in the specialty business. People like the big box specials such as the Bombay Company, Pier One, and stores of that nature. Shoppers have been shifting into these larger stores. I don’t know that our company has necessarily shifted distribution into these channels as aggressively as we could have but we intend to as we move forward.” CEOCFOinterviews: On what type of products will you focus? Mr. Gatto: “The
company will be focusing in a few different areas, one of which is juvenile; the
Russ®Baby™ brand, within the juvenile sector of the business, has been a growing
brand for us; the demographics within the baby business are terrific. I have directed our
groups here in product development and marketing to look at this business as a growth area
for the future. Beyond the Russ Baby brand, the company also owns Sassy, a brand
distributed primarily through the mass market and through Babies “R” Us,
Wal-Mart and Target; that business has been growing very aggressively in the past two
years, and I believe it has opportunity for future growth. The entire juvenile sector,
given the demographics of people having babies later in life and at a point in their lives
when they are more affluent and spending more on their babies, especially first babies,
present a great opportunity for us. Grandparents like to shower their grandchildren with
gifts, especially baby boomers in their most affluent years. I believe this company can
take terrific advantage of this fact by creating products to be passed down to
grandchildren by doting grandparents. CEOCFOinterviews: Do people pay attention to brand name? Mr. Gatto: “People care about quality and integrity. They care about price value. If you can deliver on these things on a repeated basis, and they happen to notice that the product is from RUSS, they will then begin to develop a loyalty and integrity to the brand. RUSS survived for more than forty years because we’re committed to these qualities. I believe there is a level of recognition of our brand at the consumer base and certainly there’s even stronger recognition at the trade level. That gives us entry and the ability to command shelf space and get our product into the store. There is absolutely value to brand recognition. Perhaps it’s more intense right now at a trade level, but ultimately I don’t see it as any different than other forms of consumer product marketing whereby close purchase satisfaction and by delivering beyond expectation, one tends to build brand equity. And that is what we need to do for our business.” CEOCFOinterviews: Do people still go much to the local card and gift shop and how do you replace the loss of business in that venue? Mr. Gatto: “They
are not as prolific as they were five or ten years ago. Ten years ago, there were probably
70,000-75,000 independent retail operations of that nature. Today it is down to 50,000.
Those numbers, which are provided by Unity Marketing, are substantiated by the Gift
Industry Association. One could look at a distribution base of 50,000 potential retailers
and say that is a substantial base, and if you are an optimist, you could say that 50,000
is a lot. Although it was 70,000 before, it is still a sizeable concentration of stores.
Candidly, I believe those stores can draw traffic if they had the right product. When RUSS
had Trolls or Ty Warner had Beanie Babies, and those product lines were available only
through the independent gift channel, people went to those stores because that was the
only place they could get the product. Over the last few years, there hasn’t been all
that much compelling content to drive traffic there and there’s been a decline both
in traffic and the number of outlets. As a business, an industry and a company, we have a
responsibility to create the kind of content that will drive traffic into the stores. I
take that responsibility seriously and believe that independent retailers can do well if
their product is truly differentiated and proprietary. We will have to work hard to make
sure we can provide that content so retailers can prosper in their businesses.” Mr. Gatto: “In the end, sometimes, those decisions are made by the consumer. And if that consumer is a child, the child could be very fickle and if it is an adult, who knows what can happen. There’s a certain level of design and collectability that go into “hot” categories. If you are looking to build a business, you build it a bit differently than if you are in the business of purely providing items. Trolls were great because it was a collection and there were many of them and people wanted various iterations of the concept. Cabbage Patch dolls the same thing, also Beanie Babies. There are some threads of consistency between the huge properties, which have been important. You look for collectability, or opportunities with licenses, which is something this company has never done before. Much of what sells in huge quantity over the years has been driven by literary or entertainment related license content. To the extent that there are opportunities in that sector, we will approach those and look at them as well.” CEOCFOinterviews: You just announced an agreement with Wolverine World Wide, Inc.; will you tell us about that? Mr. Gatto: “Their Hush Puppies brand plush toy, the basset hound, has been the icon of that brand for years. It’s a well-known and understood figure and we believed it was an evergreen relative to character merchandise. It translates very nicely three-dimensionally; when we created samples of the dog, it just looked terrific. It is a combination of a brand, which has been around a number of decades and translation of that brand icon into something three-dimensional, visually and tactilely.” CEOCFOinterviews: With all the electronics and video around, how do you create interest for the items you sell? Mr. Gatto: “We have a portfolio of products which are very traditional in nature. To the extent that something is soft, and huggable and emotive in nature, is important to all of us. There will be an ongoing demand for that kind of content. There are certainly things which have been electronically enhanced in the toy business, but sometimes it is not the little feature or the added benefit that an electronic chip can bring to a product that is the most important part of its being. In many cases, the soft, huggable, visually and tactilely appealing puppy dog that you take to bed with you each night is so basic to our business and to the whole notion of growing up that it can never be replaced.” CEOCFOinterviews: You mentioned a strong balance sheet; will you tell us about the financial condition and what you’ll do to push ahead on the various fronts you talked about? Mr. Gatto: “The company generated approximately 329 million dollars in sales last year. It is close to 60 million dollars in EBIDA. The company was and still is quite fortunate in that its cash position going into the last years was around 240 million dollars in cash. We just issued a major distribution of some of that money in the form of super dividends to our shareholders. Even with that, we still have close to 90 million dollars in cash. One of the things I don’t have to be overly concerned about is the capitalization of the business or future products or projects that we may want to undertake. The company’s current financial position and assets can support the agenda. Being a company with that much cash and no long-term debt, suggests that capitalizing the needs of the business as we move forward will not be a problem.” CEOCFOinterviews: What do you see as the major challenges that you face along the way in achieving your goals and how are you ready? Mr. Gatto: “The major challenges are always ones of assembling the right team of people to implement the strategies. Putting the right team together is critical. There are always concerns that anyone would have relative to factors that are beyond one’s control. Certainly economic conditions, dock strikes and things of that nature can stand in the way of consumer demand and or merchandise flow could always present temporary hurdles that we would have to overcome. I am very enthusiastic about the potential for this business and I don’t see much in the way of meaningful barriers. I believe that when you operate in a business that is as fragmented as this one is, and there aren’t any major competitors that own more than two or three percent share of the market, at a most fundamental level, the ability to arrive and compete effectively in that kind of a marketplace is very appealing. You don’t have to displace a Proctor & Gamble or a General Motors or a major shareholder within the business because they simply don’t exist.” CEOCFOinterviews: Do you see acquisitions in the future? Mr. Gatto: “Absolutely! We’ll grow this business organically and through acquisitions. Our acquisition of Sassy, Inc. a couple of years ago, has proven to be a terrific venture, an asset to the business, and a great platform against which we can grow our juvenile segment.” CEOCFOinterviews: How do you manufacture your products? Mr. Gatto: “Most of the manufacturing is done through relationships that we have with OEM factories throughout Asia, primarily in China. In many cases, the relationships go back a number of years. Russ had a family of suppliers with whom he has been doing business for decades. We have a very loyal group of suppliers throughout Asia that the company can depend on for products. At the same time, there are opportunities to look at new sources of supply. I spent the last 35 years of my career working with resources around the world, particularly in China; they offer opportunities for this company to definitely expand its supply base. Like most companies in our industry and others, there aren’t a lot of bricks and mortar on this side of the water but there are strong relationships around the world that help keep the supply flowing.“ CEOCFOinterviews: Why should potential investors be interested now and what should they know that perhaps doesn’t come through when one looks at the company? Mr. Gatto: “If one were investing in a company, I think that one would be encouraged by a competitive environment that wouldn’t be such that there were obstacles to the company’s growth. Market conditions would be one. Second, you would look at past financial performance and financial condition. Our company has proven its ability to perform very admirably from a financial perspective. The third factor is more brand related and the ability to withstand the test of time and yet be sensitive enough to the realities of current day; that you don’t necessarily limit yourself to formulas that were effective a couple of decades ago but may not be as effective in today’s marketplace. Fourth, it is about people, and that is a lot less tangible. I wish I could bottle up the passion and the enthusiasm that many folks within this business have when they walk in every morning. More than anything, the fact that we love what we do and are very passionate about the business will ultimately deliver great results. I believe that as an investor, you would want to attach your investments to people who are serious and passionate about what they do.” CEOCFOinterviews: In closing, the company has a long history in the philanthropic area. Do you see that continuing and what is the focus? Mr. Gatto: “The Russell Berrie Foundation is a major shareholder in this company and the foundation has been named by local and national experts as one of the most philanthropic organizations in the country. Giving back to the communities in which we live and work is a very important part of the tradition of our business and something that is highly motivational to many of the folks associated with the company. We absolutely look to continue creating a business that can create profit that in turn, can be channeled into good work. It is rewarding to work here everyday knowing that a significant portion of the profits of this company will be channeled into doing good work for people in need.” disclaimers |
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