L.A. Gear, Inc. History

Address:

5900 Rodeo Road
Los Angeles, California 90016-4313
U.S.A.

Telephone: (310) 822-1995
Fax: (310) 581-7709

Website: www.lagear.com

Private Company
Incorporated: 1979 as Good Times, Inc.
Employees: 10
Sales: $50 million (1998 est.)
NAIC: 533110 Lessors of Nonfinancial Intangible Assets (Except Copyrighted Works)

Company Perspectives:

'L.A. Gear is structured for the future. Our customer has grown more complex, and inherently more interesting. To that end, we will continue to redefine who we are and what we are to offer the best product available.' --David Gatto, CEO Key Dates:

Key Dates:

1979:: Robert Greenberg incorporates a roller skating rental shop as Good Times, Inc., the forerunner of L.A. Gear, Inc.
1982:: Greenberg opens women's apparel store in Los Angeles and launches the L.A. Gear label.
1984:: Greenberg closes retail store to concentrate on wholesale shoe sales.
1985:: L.A. Gear enters the athletic shoe market with the Canvas Workout women's shoe.
1986:: The company goes public, using the IPO proceeds to diversify beyond women's footwear.
1990:: L.A. Gear catapults into third place in athletic shoe sales, behind only Nike and Reebok; company sales peak at $818.8 million.
1991:: Company posts $66.2 million loss, the first of several straight years in the red; Trefoil Capital Investors, L.P., an investment fund, injects $100 million into L.A. Gear and gains a 34 percent stake in the company.
1992:: Sales decline to $430.2 million, market share to five percent; Greenberg resigns from the company.
1994:: Company abandons its foray into men's performance shoes.
1997:: Trefoil sells its interest in the company to PCH Investments for $228,000.
1998:: L.A. Gear files for Chapter 11 bankruptcy protection, emerging late in the year as a pure licensing company.
1999:: L.A. Gear-branded products manufactured under license make their first appearances.

Company History:

Near the end of a tumultuous decade, L.A. Gear, Inc. emerged from bankruptcy in late 1998 as a pure licensor--and former manufacturer--of the L.A. Gear brand for footwear, apparel, and accessories. The company's most significant partner is ACI International, with which L.A. Gear has a licensing agreement to produce women's, children's, and men's footwear (the owners of ACI also hold a stake of about 50 percent in L.A. Gear itself through a Los Angeles-based investment company, PCH Investments). L.A. Gear has other licensing agreements covering women's and girl's active/lifestyle clothing, children's swimwear and activewear, eyewear and sunglasses, hosiery, and watches. The company revolutionized the world athletic shoe market in 1985 by developing shoes that incorporated the comfort of sneakers with the frills of fashion shoes. Company founder Robert Greenberg's ability to design shoes that appealed to young women fueled L.A. Gear's rapid rise to third place in athletic shoe sales behind Nike and Reebok by 1990. The success of the shoe sales led to L.A. Gear's diversification into the men's and children's shoe markets and the casual apparel market. L.A. Gear's product appeal was not universal, however. As L.A. Gear tried to expand into the men's market, its shoes were not well received, sales plummeted, and a string of loss-making years ensued. Several turnaround attempts, management shuffles, and staff reductions later, the company filed for bankruptcy protection in early 1998, emerging after several months as a privately held licensing company.

1985-90: The Phenomenal Rise

L.A. Gear evolved out of the longtime entrepreneurial adventures of Robert Greenberg. Greenberg attributed his entrepreneurial bent to his father, who sold fresh produce in Boston, and to his father's subscription to Forbes magazine. 'I always wanted to be the president of a company on the New York Stock Exchange,' Greenberg told Los Angeles Magazine, adding that had his father subscribed to Sports Illustrated he would probably have been a baseball player. As an entrepreneur, Greenberg had a legacy of picking and riding trends. The one-time hairdresser incorporated a roller skating rental shop in 1979 under the name Good Times, Inc., and that company eventually grew into a skate-manufacturing business called United Skates of America. But when skate sales waned, he spotted the profitability of novelty shoelaces and sold $3 million worth in three months. In 1982 Greenberg opened a Los Angeles women's apparel store on Melrose Avenue which sold major brand name clothes, shoes, and accessories. In this store Greenberg launched the L.A. Gear clothing label.

The L.A. Gear brand name actually came from a T-shirt saleswoman's comment in the company warehouse. After the saleswoman declared her shirts were 'real L.A. gear,' a clerk jotted down the name and submitted it for the contest Greenberg had introduced to find the right name for the retail store. 'Of course, I looked at the piece of paper and threw it away,' Greenberg told Los Angeles Magazine. 'But at four in the morning, I woke up and thought, `My God, L.A. Gear!' Initially, the L.A. Gear label signified casual clothes, shoes, and sandals. By 1984, however, Greenberg decided to concentrate the company's efforts on wholesale shoe sales, and closed the unprofitable retail store. Business partner Ernest Williams, however, 'felt there was no room for another athletic-footwear company,' Greenberg told Los Angeles Magazine, and Williams broke their partnership.

It did not take Greenberg long to establish a presence in the athletic shoe market. Greenberg tapped his lengthy experience with companies in the Far East to find independent companies who would produce and distribute his shoes. L.A. Gear entered the athletic shoe market with the Canvas Workout shoe in 1985, and the company soon met with great success. Greenberg's shoe designs were targeted at fashion-conscious females between the ages of 12 and 35 who wanted stylish, comfortable shoes, according to Forbes. The overwhelming reception in the marketplace pushed sales from $200,000 at the beginning of the year to $1.8 million at the end of 1985.

In 1986 L.A. Gear became a public company, and the money raised from the stock offering allowed the company to diversify. L.A. Gear's main business was footwear, but in the late 1980s it began producing sport and casual wear for men, women, and children. The apparel division featured knit tops and sweat clothes with bold L.A. Gear graphics and basic five pocket jeans decorated with frills. The company also continued to develop its shoe lines. Building on the enormous success of the Canvas Workout shoe for women, L.A. Gear began to spruce up its line of basic women's shoes with gold lamé, fringe, pastel colors, and spangles. For men, the company produced bold, jazzy hightops for basketball. L.A. Gear's children's shoes stimulated young eyes with black and white checkerboard and cow spot designs. The company also marketed street shoes called Street Hikers that combined an urban appearance with the comfort of sneakers. Even though L.A. Gear continued to market its original styles into the early 1990s, it unveiled new styles every year.

Business Week contributor Kathleen Kerwin attributed L.A. Gear's almost instant success in footwear sales to their ability to appeal to the 80 percent of customers who 'rarely set foot on a tennis or basketball court.' L.A. Gear's growth in sales and product recognition surpassed that of the entire footwear market. Sales increased 200 percent in 1986 and doubled the next year. In 1988 and 1989, Business Week selected L.A. Gear as one of the best small American companies. Business Week, the Wall Street Journal, the Los Angeles Times, and Fortune highlighted L.A. Gear's stock as the best performer on the New York Stock Exchange in 1989. In 1990 company sales peaked at $818.8 million, as did its share of the U.S. athletic shoe market; its 11.8 percent share placed it third behind Nike and Reebok.

Despite L.A. Gear's phenomenal performance, skeptics questioned the endurance of the brand. In 1990 L.A. Gear was thought to be a 'flash in the pan,' Montgomery Securities' apparel analyst Alice Ruth told Institutional Investor. Skeptics based their fad theory on L.A. Gear's relatively weak sales in sporting goods stores, the conventional athletic shoe outlets. But Ruth touted the staying power of L.A. Gear because it was inundating department stores and mass merchandisers. Noting the narrow focus and clientele of sporting goods stores, Los Angeles Magazine contributor David Jefferson called Greenberg's decision to capture a larger clientele in department stores such as Nordstrom, May Co., and Bullock's a 'brilliant marketing strategy.'

By 1990 Greenberg felt the company was secure in its niche. 'We've taken the number three position now. Our brand is growing and consumer confidence is gaining every day,' he told the Wall Street Transcript, adding that he expected the company 'should only fuel itself now.' The majority of L.A. Gear's success, however, laid in the hands of the two men responsible for the L.A. Gear image: Greenberg and Sandy Saemann. Greenberg designed the shoes. His friend and former colleague in the skate business, Sandy Saemann, masterminded the marketing. Greenberg's and Saemann's appeal to fashion-conscious females was unique. 'L.A. Gear has really hit on a formula no one else has,' John Horan, publisher of Sports Management News, told Advertising Age in 1989. 'They take a shoe that's not a real technical shoe, so not expensive to produce, put some spangles and some colored trim on it,' and 'put their money into marketing and advertising.' Saemann designed ads that were not as 'slick' as ads for Reebok or Nike but were 'effective,' according to Marcy Magiera in Advertising Age. 'They sold sex and sizzle,' noted Business Week.

L.A. Gear's ads focused on the sunny glamour of the Los Angeles lifestyle, featuring beautiful young blondes wearing little else besides their L.A. Gear shoes. In 1990 Horan told Advertising Age that 'of all the ads out there, [L.A. Gear's] seem to turn the sales on and off.'

Encouraged by its success in the women's market, L.A. Gear decided to expand its sales in the men's market in 1989. L.A. Gear employed the same fashionable design and glamorous marketing techniques that had proved successful in the women's market to enter the men's market. Relying on jazzy designs and what industry analysts considered unusual endorsers, L.A. Gear marketed shoes in what they called the 'fashionable' basketball market, featuring boldly designed hightops called Street Slammers, Hot Shots, and Brats. The men's market, however, was highly competitive; men's athletic shoes accounted for 70 percent of L.A. Gear's competitors' total sales but only 20 percent of L.A. Gear's total sales. Yet L.A. Gear's strategy of emphasizing fashion in the men's market seemed an odd strategy for growth because 'men typically pay less attention to style,' wrote Kerwin in Business Week. Avia marketing chief Bruce W. MacGregor added in Business Week that 'technology has been the fashion' in the men's market.

Rather than hiring a young sports superstar such as Bo Jackson, Nike's endorser at the time, L.A. Gear hired retiring Los Angeles Laker Kareem Abdul-Jabbar to endorse a line of basketball shoes called Jabbars. One analyst predicted in Business Week that this move would appeal to the 'geriatric crowd,' rather than foster the category growth the company wanted. The company's main endorser was an even more unlikely athletic shoe sponsor. Pop singer Michael Jackson was paid close to $10 million to be the company spokesperson and to design a line of shoes and T-shirts. The company's use of Michael Jackson was 'more than a growth opportunity, they're trying to maintain their fashion image,' Paine Webber analyst Frank Podbelsek told Advertising Age. Under the umbrella theme 'Unstoppable,' L.A. Gear prepared to tap Michael Jackson's worldwide popularity by coordinating the Jackson line rollout with the release of a collection of his greatest hits called A Decade. Michael Jackson's album was never released and his black, heavily buckled shoes did not sell well. His endorsement and the line were both quickly discontinued. This series of events cost the company several million dollars.

1991-97: The Spiral Downward

L.A. Gear paid the price for these misadventures in increased inventories and diminished profits. Inventory stockpiling due to unrealistically high sales projections caused the company to discount almost all their shoe styles to liquidate the inventories. Yet selling the shoes at discounts angered retailers because it made their prices seem exorbitantly high and degraded the L.A. Gear brand image, according to the Los Angeles Times. Bad marketing decisions, coupled with rebellious retailers who began to refuse L.A. Gear shelf space contributed to a net loss of $66.2 million for the company in 1991. The company's market share continued to expand in 1991, but at the expense of profits.

Aware that fashionable men's athletic shoes would not generate profits, the company decided to branch into the men's technical shoe market with the introduction of the Catapult basketball shoe in 1991. The $100 Catapult, which featured a fiberglass and graphite heel supporting an air cushion, was marketed without the L.A. Gear brand name to 'distance Catapult from L.A. Gear's young, low-price image,' creative director Michael Albright told Advertising Age. As part of its new strategy, the company chose a more typical endorser: Karl Malone, a Utah Jazz basketball star. Unfortunately, problems with product quality interfered with initial sales. After the company outfitted a Marquette University basketball team in Catapult shoes, one player tripped on his shoe sole as it peeled off during a televised game. The company reported that it was working to improve the shoes' quality and the university team continued wearing the shoes.

L.A. Gear's entrance into the technological shoe market was not without other problems. Initially, L.A. Gear failed to differentiate its technology enough to please competitors. Nike filed a suit against L.A. Gear in 1991 alleging the Catapult infringed on Nike's patented 'spring moderator' technology. In a similar case, L.A. Gear paid Reebok $1 million and licensing fees in an out-of-court settlement in 1992. L.A. Gear's Regulator series infringed on the patented technology of the Reebok Pump. Under the licensing agreement, L.A. Gear continued to develop its line of inflatable shoes under the Regulator and the Gauge brand names. Moreover, it built on Catapult technology with the Twist-a-pult shoe, which allowed the wearer to adjust the amount of cushion offered by the Catapult mechanism. Meanwhile, also in 1991, the company introduced the L.A. Lights series of lighted athletic shoes for children, which fared better than the men's line.

L.A. Gear's efforts to establish a significant presence in the men's market left it facing financial troubles. In 1991 the company went into technical default on its bank loan, and to free itself from the confines of the bank's regulations, it looked for an investor to support the company through its slump. Trefoil Capital Investors, L.P.--an investment fund managed by Shamrock Advisors, Inc. and led by Roy E. Disney, nephew of Walt Disney and vice-chairman of the Walt Disney Co.--invested $100 million in L.A. Gear, giving Trefoil a 34 percent stake in the company. In accordance with its investment agreement, Trefoil assumed control of the board after L.A. Gear was unable to pay Trefoil dividends for three consecutive quarters, and they began to make a number of changes. Mark Goldston, a one-time Reebok marketing executive, was given responsibility for L.A. Gear's business dealings as president and chief operating officer; several new managers were hired to bring the company back to profitability; and Greenberg was encouraged to concentrate on what he did best--designing shoes and picking trends. Greenberg announced he would work without pay until the company made money. By the end of the year, however, Advertising Age reported that L.A. Gear's market share had dropped to eight percent from its high of 11.8 percent in 1990.

As Trefoil increased its control of the company's operations and added new senior managers, Greenberg decided to resign in early 1992. He told the Los Angeles Times that 'after eight years of constant involvement with L.A. Gear, I can now devote more time to my family.' As a one-time L.A. Gear employee told the Los Angeles Magazine, 'People who build a billion-dollar company aren't always the people who can run a billion-dollar company.' Upon Greenberg's resignation, Stanley Gold, a man known for his ability to return companies to profitability, was positioned as chairman and CEO by Trefoil. The Trefoil-picked management had a record of success in the footwear industry, as well as a reputation for saving floundering companies.

The new management began to pare down the business as the company's drop in market share moved it from third to fourth place among footwear companies. Scattered corporate offices were consolidated in a new Santa Monica, California, headquarters, which reduced costs and brought all senior management together. To further reduce costs, the company closed its apparel production and marketing facilities, opting to license its name to a few garment-making companies instead. Goldston stressed in PR Newswire that the licensing agreements increased 'the range and quality of non-footwear products that will be offered both domestically and internationally under the L.A. Gear brand name.' In 1992 the cost-cutting measures included a 45 percent staff reduction.

To lend consistency to the company's image, Goldston announced in a 1992 article in Advertising Age that the company would separate the fashion and fitness products into distinct lifestyle and athletic shoe divisions that 'will run as stand-alone companies in the marketplace.' The divisions would be distinguishable by the diamond-shaped L.A. Gear logo for the lifestyle shoes and the square L.A. Tech logo for the high-tech athletic line. The children's shoes would also be marketed separately using the Bendables logo that featured a drawing of a baby. Such demarcations would allow the divisions to market their products to suit the needs of very different markets. Shoe quality and distribution were also enhanced after the company reevaluated the independent manufacturers and distributors with whom it was doing business. In 1992 L.A. Gear signed a sourcing agreement with LASCO, an affiliate of Pentland Group plc, the world's largest sourcing agent, respected throughout the footwear industry. LASCO would be responsible for inspecting the quality of the finished products as well as supervision of production, scheduling, and all foreign shipping. The company's shoes continued to be manufactured mainly in the People's Republic of China, Indonesia, South Korea, and Taiwan. On the distribution side, L.A. Gear moved away from selling its shoes at discount outlets, convenience stores, and supermarkets (a semi-desperate strategy to sell off unwanted inventory anyplace possible, which included flea markets) and placed emphasis on department stores and shoe stores, hoping to further enhance its image through this full-priced strategy.

Trefoil also updated the 'dated blondes-at-the-beach' advertising strategy, noted Advertising Age contributor Marcy Magiera. The company decided to break with the industry marketing trend of using a media buyer and search for a full-service outside advertising agency that would handle both creative work and media planning. Ogilvy and Mather was chosen to create ads and buy media space in late 1991. 'Get in Gear,' the new umbrella theme, was unveiled at the 1991 Sporting Goods Manufacturer's Association Super Show in Atlanta, Georgia. Goldston, concerned about contemporizing L.A. Gear's image, said of the new theme that 'our strategy is athletic lifestyle and the theme line is one that can be used for years and years,' according to Advertising Age.

Along with the new advertising theme came a new advertising strategy. The company would no longer spend mammoth amounts on superstar sponsors; a three-year endorsement budget was set at $8 million, according to the Los Angeles Magazine. The long list of celebrity endorsers was pared to three: Hakeem Olajuwon, Joe Montana, and Karl Malone, who would continue to represent the men's line of technical sport shoes.

As losses continued despite the numerous turnaround moves, L.A. Gear announced in June 1994 that Goldston had resigned and was being replaced by William L. Benford, who had been executive vice-president and CFO. At the same time, the company announced an agreement with Wal-Mart Stores, Inc., whereby the discount retail giant would buy at least $80 million of L.A. Gear shoes per year over a three-year period starting in 1995. Wal-Mart outlets began selling specially designed, lower-end L.A. Gear footwear that year. This move seemed to contradict L.A. Gear's upscale marketing strategy adopted only recently but the company apparently felt it could not pass by such a lucrative opportunity. L.A. Gear made another strategy shift in the summer of 1994, electing to abandon its foray into men's performance shoes altogether. The new emphasis would be on women's and children's shoes. L.A. Gear also intended to pursue a multibrand strategy through the acquisition and licensing of key brands; its first step to this end, however, the acquisition of Ryka, Inc., a troubled maker of high-performance women's athletic shoes, was abandoned in mid-1995 because of the further deterioration in Ryka's financial performance. In September 1995 L.A. Gear announced that it would close its eight retail outlets and reduce its workforce by an additional 30 percent. Results for the fiscal year ending in November 1995 were abysmal: a $51.4 million loss on sales of just $296.6 million. L.A. Gear had also fallen to sixth place in the U.S. athletic shoe market, with a market share of only three percent.

In April 1996 the company was unable to pay the $50 million in dividends it owed to Trefoil, so the investment firm accepted a preferred stock swap that increased its ownership interest in L.A. Gear to 42 percent. In November of that year, hurt by a decline of its sales to Wal-Mart and a drop in demand for its lighted children's shoes, L.A. Gear announced the elimination of another 55 percent of its workforce (from 310 to 140) and a one-time charge of more than $28 million. Benford resigned as president and COO, with Bruce MacGregor, senior vice-president of marketing, replacing him on an interim basis. The company's downward spiral continued in 1997, however, when sales fell still further, to $125 million. In October 1997 Trefoil sold its 42 percent stake in L.A. Gear at a self-described 'substantial' loss, accepting just $228,000 from PCH Investments, a Los Angeles-based investment partnership headed by Steven Jackson and Richard Hollander. Gold and six of the eight other directors of L.A. Gear's board immediately resigned. Of Trefoil's turnaround attempts, Gold told the Wall Street Journal, 'We tried three different management teams. We clearly didn't have the key to unlocking the profits.' David F. Gatto was named the new chairman and CEO of L.A. Gear, having previously worked at software company Syncronys Softcorp before joining L.A. Gear in June 1997 as chief administrative officer.

1998 and Beyond: The Manufacturer-Turned-Licensor

In January 1998 L.A. Gear filed for Chapter 11 bankruptcy protection in order to implement a reorganization plan with its bondholders. By the time the company emerged from bankruptcy in late 1998 its new managers had settled on a radical plan to transform the company from manufacturer to licensor of the L.A. Gear brand. Gatto told Apparel Industry Magazine, 'With an emphasis on growing L.A. Gear's valuable trademarks and trade names, licensing efforts will focus on key apparel and accessory categories [as well as] existing lines of footwear.' Having voided its existing stock, it also emerged as a private company, controlled and owned by PCH and the bondholders. The new L.A. Gear had a workforce of just ten.

The company's largest initial licensee was ACI International, a Los Angeles-based footwear manufacturer, which was itself run by Steven Jackson. In the spring of 1999 ACI rolled out a new line of L.A. Gear footwear, including women's and men's casual athletic shoes and children's L.A. Lights shoes. In this and other licensing deals, L.A. Gear received a percentage of the resulting sales for the use of its brand and also worked closely with its licensees on the marketing and distribution sides. Gatto told Sporting Goods Business, 'We have pretty strict contractual controls built in. We'll set the direction for the brand within each category. We'll review samples and get involved in distribution if it becomes an issue.' Gatto also said the company planned to stay away from discount channels, such as Wal-Mart and Target. Among L.A. Gear's other early licensees were New York-based Kidfusion, for a children's swimwear and windsuit collection; Los Angeles-based Jerry Leigh, for a line of women's and girls' active apparel; South Hackensack, New Jersey-based Farash & Robins, for a line of digital and analog watches for men, women, and children; and Fyffe, Alaska-based Kilgore Hosiery, for athletic and fashion socks in sizes from infants to adults. This move toward licensing&mdash well as another diversification beyond footwear--was clearly the boldest attempt yet to revitalize a brand that had once known glory, if ever so briefly.

Principal Competitors: adidas-Salomon AG; Converse Inc.; Fila Holding S.p.A.; K-Swiss Inc.; New Balance Athletic Shoe, Inc.; NIKE, Inc.; Reebok International Ltd.; Russell Corporation.

L.A. Gear, Inc. History

Company Perspectives:

Key Dates:

Company History:

Further Reading: