The Acquiring Kind

Having recently closed the books on its most profitable year ever, Greg Tunney, CEO of RG Barry, makers of Dearfoams, Baggallini and Foot Petals, says the company is primed for more acquisitions—and plenty more growth in the years ahead.

By Greg Dutter

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Having recently closed the books on its most profitable year ever, Greg Tunney, CEO of RG Barry, makers of Dearfoams, Baggallini and Foot Petals, says the company is primed for more acquisitions—and plenty more growth in the years ahead.

By Greg Dutter

What are you reading?

Jim Collins’ Great By Choice. I wish he wrote it 20 years ago. It would have saved me from a lot of mistakes I’ve made during my career.
What one word best describes you? It’s a phrase. I can go from a meeting about the balance sheet of a company to a product meeting about colors to an HR discussion about organizational structure and people often say, “Greg gets it.”

What is inspiring you most right now?

My two oldest kids are getting married in April and May of this year. Watching them go through all the pomp and circumstance leading up to those big days is pretty inspiring.

Who would be your most coveted dinner guest?

I am a major foodie, so it would be chef Ronny Emborg.

What is your favorite food?

Mexican. I grew up out west.

What is you most guilty pleasure?

Surfing in Central America.

When is the next surfing vacation?

This May in Punta Mita, which is about 50 miles north of Puerta Vallarta, Mexico. The water temperature is 80 degrees, it’s a long, clean, glassy break—ideal for a long boarder like me—and that month is when the south swell hits.

What might people be surprised to know about you?

When people get to know me they are surprised to learn that I have zero ego.

After 65 years, RG Barry has officially entered the next phase of its history and CEO Greg Tunney couldn’t be more excited about what this new era presents for the Columbus, OH-based company, its investors and retail partners. It’s been a seven-year process since Tunney came on as CEO, but the corporate makeover is complete and now bearing fruit. “When I got here we were making, on average, an operating profit of $6 or $7 million per year and, last year, we made $26 million in operating profit,” Tunney says. “The market cap back then was in a range of $60 or $70 million and now it’s $160 million.” Need more? “We made more money in the last five years than the company made in its first 60 years combined,” he adds.

No longer just a slipper company, the new RG Barry is a diversified brand management company that spans the slipper, handbags and comfort insert markets. Having shifted out of the licensee business a few years back, which freed up tons of capital, the company set its sights on owning brands—starting with becoming a part of the $9 billion handbag industry with the acquisition of Baggallini 18 months ago. And then becoming part of the $1 billion comfort inserts market with the acquisition of Foot Petals soon after. Tunney says the decision to branch out beyond the comfort zones of slippers and, for that matter, footwear, has to do with ROI. Specifically, the accessory market ROI is just too good to ignore. For starters, he notes accessory categories are higher margin businesses on the wholesale and retail sides than apparel and footwear. Take handbags, for example. Tunney cites the first rule of thumb: “I’m never out of size.” Secondly, the category is hot and shows little signs of cooling. As for the comfort insert business, Tunney notes that Foot Petals basically sells itself and, if presented correctly by retailers, can improve upon the customer’s footwear purchase, which increases the odds that a satisfied shopper is likely a repeat one, too. “You can imagine how much Dr. Scholl’s owns of that market, but if we only own 10 percent of that, that’d be a nice sized business,” Tunney notes.

Both Baggallini and Foot Petals were performing well (growth rates of 15 and 20 percent annually, respectively, for the previous five years) but needed the financial investment to take them to their next levels. And that’s where Tunney couldn’t wait to step in with RG Barry’s assets and expertise. “We saw them as emerging brands that we could own, put onto our platform and leverage,” he says. Both brands met the company’s 10-point acquisition filter, beginning with being in line with RG Barry’s new mission statement: “Fashion and function for a great life.” “The one common theme in all of our acquisitions going forward is the brands have a dual play,” he says, adding the first two acquisitions have already paid off. Now it’s a case of rinse and repeat. “We spent more than $40 million acquiring the two brands and today we have more than $40 million in cash again on our books,” he says. “So we’ll continue to make acquisitions as we find emerging brands that fit into our portfolio.”

Call it a complete company makeover, a process Tunney embarked on by changing the cultural mindset of its employees before diving into any acquisitions. Tunney opted for the behind-the-scenes approach believing that without its people on board any new and improved RG Barry would remain a pipe dream. Tunney says even the board of directors was a bit perplexed that the new CEO didn’t come in right away with a flashy announcement of his arrival and shake the sleepy slipper company out of its slumber. “My experience has been it’s much more difficult to change culture in order to thrive going forward than just fixing the balance sheet,” he says. The process took a couple of years, which involved major investments with the Covey Group and other best practices to decide who was going to be the part of the team and who wasn’t. “We decided to get the team right before we go out and execute,” Tunney adds.

Flush with capital, Tunney and his team are full-steam ahead on finding more acquisitions—the footwear space included. In fact, the goal is to add at least one per year over the next five years. Anything less and Tunney says it’d be a failure based on the hard work that put RG Barry into the position to make these deals. “That’s what we believe is our destiny,” he says. “We’ve spent a lot of time in the first five years developing the foundation and the execution and we can provide additional infrastructure, capital and best practices.”

Tunney believes RG Barry’s makeover is a unique industry story that needs to be told. “Most companies in our industry aren’t publicly run so you really don’t know the numbers, although many say business is great and growing. Well, quite frankly, not everything is great or growing at many of these companies,” he says. In contrast, RG Barry’s numbers are a matter of public record. “We are pretty proud of what we have been able to accomplish,” he says, believing the best is yet to come. Five years down the road, Tunney envisions sales of $250 million annually. “If we could add another five companies in the next five years, we could exceed that $250 million,” Tunney offers. “When I got here we were less than $100 million, so that’d be a pretty good ride.”

Why shift from a licensee-driven portfolio to owning brands?
It seemed like the more we grew those licenses the more they wanted to charge a bigger fee. So it’s like, do you want to rent an apartment or do you want to buy a house? We made a conscious decision to own brands instead of renting them; also realizing they could be taken away at some point. We exited out of the Nautica deal, which was a pretty big business for us, and we did not renew our Levi’s and Superga agreements. But through that process we accumulated in excess of $40 million to buy Baggallini and Foot Petals. Last year was really the first full fiscal year (ends July 1) of owning those, and that’s why operating profits went from $6 million to $26 million.

What other categories are you looking at for potential acquisitions?
First, I wish I could say I was the author of this strategy. But when I got here some of our key accessories buyers, who act as a catchall buying handbags, slippers, socks, sunglasses—you name it—said that they couldn’t buy more slippers from us because, in some cases, we were doing 100 percent of their volume between Dearfoams and private label. But if we ever got into these other businesses they would be glad to support us. So we put together a 10-step filter to rate potential acquisitions. We looked at 11 different accessory sectors. Handbags is where we found Baggallini, which is probably the best acquisition I have made in my career. We really like the bag business and, going forward, I think it wouldn’t be uncommon to see us purchasing other bag companies. And in regard to comfort inserts, Foot Petals owns the female side of that business, so it would not be unreasonable to see us look for a male comfort insert brand. Now I don’t know if you will see us buy a slipper business, but I don’t think you’d be surprised if you saw us buy a sandal company, which is counter seasonal to slippers. And I’m not against buying a shoe company, except that we have found accessory companies typically have a much higher return than shoe companies. Nevertheless, I would love to buy a pure play shoe brand. We’ve been looking, but we just haven’t found one that really is a fit according to our filter. So if you know of a good one, I’d love to know (laughs).

What is fueling Baggallini’s growth?
First of all, it’s a real brand with a real story. It’s the result of two flight attendants, Dixie Powers and Ann Simmons, who were flying all over the world but couldn’t find any handbags that were designed in such a way that organized all of their items. So 15 years ago they decided to develop handbags that are lightweight, have organizational functionality, and can be done in bright colors that are fun and exciting. That is the essence of Baggallini today. The brand truly has the double play, whereas most handbag plays are strictly fashion. Baggallini’s colors, materials and styling have fashion appeal, and customers will tell you how much they love the organizational aspects. It’s the same with our slippers: We think we make some beautiful designs, but at the end of the day they are extremely comfortable. And Foot Petals is probably the epitome of functionality. [Founder] Tina Aldatz had a dream to make inserts for sexy shoes. Can it get any more functional than a comfort insert? That’s why you will see us purchasing brands that have a fashion angle and some type of functionality. Fashion comes and goes, but the functionality is what brings the customer back. To that end, Baggallini and Foot Petals consumers are cult-like in their allegiances to the brands. Lastly, Baggallini only has two promotional events a year and Foot Petals never goes on sale. We’ll take it out of the store before we allow somebody to promote it. When you take into consideration just how many footwear brands go on sale, I think that is a unique feature to both of these brands. It’s also one of the reasons why you won’t see us acquiring a private label company. We like the dynamics of full-price branded businesses. Dearfoams is a promotional brand, so we already have one in our stall.

In addition to functionality, what else might be contributing to Baggallini’s success?
Part of its strength is price. It trades in a range of $80 to $200, which is a pretty sensitive area with respect to the bag market. But in terms of quality, we have 100 percent inspection rate on all bags. I can tell you there are $500 bags that don’t have that rating. We are definitely in a niche. We don’t make leather handbags except for some trims because the brand DNA is lightness and travel-friendly. Now people have inquired about doing shoes for us as a license agreement, but that’d be much further down the road. Between luggage and small leathers, there are a lot of other categories that are much more natural extensions. Having said that, we love the brand as it stands. When you make an acquisition, you always hold your breath and ask, “I wonder what skeletons are in the closet?” Baggallini has been better than advertised. They have 2,700 independent boutique accounts and we have started to layer in larger non-promotional chains. We have a successful program with Dillard’s and are looking to roll out in Von Maur and Nordstrom next year.

Do you have plans to consolidate the acquisitions in Columbus?
No. Baggallini was founded in Portland, Oregon, and that’s where it’s still based. It’s a great place for design. And we let them run the product, marketing, selling—the face to the customer—while Columbus takes over the backroom, be it the sourcing, supply chain, logistics, finance and systems. We believe that’s where we bring the best synergy. It’s no different with Foot Petals: their offices are still in New Jersey and Tina is out in L.A. doing her thing for us. It’s a model we think we can repeat as we approach other companies. Basically, we think that DNA is too special and unique to uproot. If we bought a sandal company based in San Diego, for example, we wouldn’t move it because, quite frankly, we would probably screw it up. My take is brands are all about people and they have the passion and vision to make those brands happen. Dixie and Ann, for example, were high school graduates turned flight attendants that had no capital or money, but because of their vision they made it happen. Tina’s story is very similar. We are very upfront in our acquisition meetings: If they say they want our check and they’ll give us the keys, then we will run away from the deal. We are looking for company owners that love the business and want to continue to be a part of it.

Are there a lot of companies that could potentially meet your filter?
The company has to have a certain amount of volume. But what you find is there are a lot of $10 million and less companies that are so far from really getting the traction that they need. My concern right now is not so much the amount of companies we can look at, but getting through to the quality ones. There are a lot of labels out there where people are just doing stuff. We are looking for people that have got brands that actually have a soul to them and are something that we can build upon. That’s the challenge: finding the next Baggallini or Foot Petals.

Aren’t there a lot of other companies looking for such brands as well?
One of the advantages we have is our niche of $40 or $50 million acquisitions. We love that type of size. VF Corp. or Wolverine, for example, can’t even look at a $50 million company. It won’t move the needle for them. In fact, I read that VF said it’s next acquisition sweet spot is around $1 billion. And Wolverine just made a $1 billion acquisition with the PLG brands. So I think we have an advantage in that we are a good alternative for a brand in that $20 million to $50 million range that can become part of a publicly held, top-performing company and get the benefits of all that.

Many brands of this size are still in their relative infancies, no?
Baggallini was a $20 million acquisition, but we bought it because we think it could become a $100 million business. We bought Foot Petals because we think this is a business that we can take between $50 million and $100 million.

Speaking of Foot Petals, how do you get retailers to realize the sales opportunity the category presents?
If you could help me on that, that’d be great (laughs). Seriously, if you look at Dillard’s, we are selling between 7,000 and 8,000 units a week. And that’s just reorders every week where they then sell it all at full price. Zappos has also figured out how to take somebody who is buying a high heel, for example, and when that customer checks out a message pops up offering Foot Petals. She is already spending a decent amount on the shoes and for $6 she can actually improve the product she is buying. Sales are up about 130 percent this year with them. But I will say traditional shoe stores are a tougher bunch to convince.

It seems like a no-brainer.
It is. Shoe buyers should also consider the fact that no matter who shows up at their desk from the wholesale side, it’s really to buy their shoes that most likely will cannibalize brands they already carry. Whereas when we show up, we are offering a product that addresses fit and comfort issues that helps convert footwear sales. In addition, Foot Petals products turn faster than shoes, because there are no sizes. And let’s not forget footwear’s dirty secret where the uppers and bottoms are beautiful but the insides are often an afterthought. Many brands don’t use state-of-the-art technology like Poron. They use inferior components because that’s not what necessarily sells the shoe. So our products are definitely an enhancement. In addition, comfort inserts is one of the few businesses where the men’s market is bigger than women’s. Men put comfort inserts into work boots, casual shoes and everything else. That’s why we believe we have the propensity to own 10 percent of this ($1 billion) market with the addition of a men’s brand.

Might it be easier to launch your own men’s brand in this space?
I’m kind of a brand guy so I would be more interested in finding the right brand. Although people often say to me now, “You’ve got the money, so why not build it yourself?” But watch VF and Wolverine, for example. VF has got billions in cash and could build anything they want. But they don’t. They acquire brands they like. And why did Wolverine buy Keds, Sperry and the others? They could have done it themselves—they’ve got the sourcing, sales force and knowledge. But they wanted the brands to build upon those foundations. I’m the same way.

What is it about the power of great brands?
People buy brands because they enhance their lives. They provide solutions. Why does someone pay more for an iPhone? They could buy any cheap phone they want, but they pay more for one of those because there’s a brand value that consumers relate to and enjoy. We believe that brands are going to continue to be more powerful, especially if you know how to manage them. Forget about now and look five, 10 and 15 years out as the world becomes more globally connected as communications continue to improve.

Moving on to the soul of RG Barry, what’s new with Dearfoams and the slipper category as a whole?
It’s a growing category. When I got to RG Barry seven years ago slippers were more at-home wear. But with the whole casualization of America going on—even college kids wearing pajamas and slippers to class—it has led to a fusion between what people wear at home and what they wear outside. Slippers just fit into today’s lifestyle. And it’s a matter of us now interpreting silhouettes that can be that fusion between casual and slipper wear. For example, the current boat shoe and recent moccasin trends had slipper versions. It represents a real change in dynamics from when it was just a basic silhouette suitable only in the home. It has made the category more relevant. I’ll also add that it definitely doesn’t hurt to have brands like Ugg selling $150 slippers. It makes the category cool and exciting—like the current trend in smoking slippers. Dearfoams, which has the No. 1 market recognition, sells versions at a value of $30. We love it when those brands make slippers cool.

How would you assess the retail market in general right now?
You are not seeing the big jumps nearly as much as before. You are seeing the good operators figuring out how to do it better each and every year. Five and 10 percent growth is the type of environment we’re in. Those are the celebrations. The good old days where someone was jumping 50 percent is a rarity. And that might be from a consumption standpoint. Maybe people aren’t all-consuming as they were before the big recession. Back then if you had something that wasn’t selling, you’d discount it at 25 percent and it cleared out. But today’s consumer has so many options to buy so many things that when you mark an item down 25 percent, they don’t necessarily care. If they don’t need it, they’re not going to buy it. Consumers today know more than ever what they want.

Any fears of consumers falling off another cliff of some sort?
I think in our price point and product sectors we’re fine. Most of our stuff is wearables, meaning they wear out and need to be replaced on a regular basis. Even back in ’09, sales were dropping 50 percent for some companies; we actually picked up 8 percent that year. A Foot Petals insert is less than $10. A Dearfoams slipper is less than $30 and a Baggallini bag is less than $200. If the economy gets tough, or if we go into a double dip like some analysts have been talking about, consumers may stop buying houses, cars or refrigerators, but they can still afford these items. The real concern is at the top end and how people are affording mortgages. Or, how are they going to pay for their kid’s college education? Or how are they going to provide for their retirement? Those questions are what people don’t have answers to.

What flies in the face of this perhaps is department stores pulling out all the stops with lavish shoe presentations. What’s that all about?
Department stores are smart. First of all, the apparel business hasn’t been growing overall, especially if you take out denim for the last decade. And apparel margins are also horrible. That’s why you see huge presentations of handbags on many first floors. They offer good margins, they’re profitable and the category is growing. Same for footwear. It’s been growing, although not as robust as other accessory categories. But this season the uniform for every woman—young or old—has been black tights or jeans tucked into some type of high-riding boots. The footwear has become the centerpiece of the outfit. The tights could be from Target. The jeans could cost $50. The handbag and the high riding boot are the signature items. So I don’t think anyone should be surprised seeing department stores make footwear a destination point.

Any danger of it becoming too much of a good thing?
Some stores may over do it and then it will become un-productive, and they’ll have to scale it back. In the meantime, shoes and handbags continue to create excitement. Handbags used to be a very replacement-type business but what suppliers have done with shapes, materials and hardware continues to reinvigorate the category. You have to give the players a lot of credit. The same goes for footwear. As other consumable categories have gone down, footwear has done a pretty good job of bringing new ideas into the marketplace.

Well, the utilitarian benefits of a bag or shoes blow away jeans or a shirt. Just take into account the amount of expensive gadgets men and women are lugging around these days.
I agree. In order to go anyplace, you’ve got to have a tote bag to fit your phone, iPad and whatever other essentials you might have.

Where do you see RG Barry five years from now?
With the right brands, capital and infrastructure, I believe there are huge opportunities for us. It gives our portfolio the ability to innovate and be on the edge of technology. And that innovation can be everything from product to systems to you name it. If you are not moving forward each and every day in this business, it will brutalize you. Most people think M&A work is all about some great deal where you negotiated a better price. But what it really comes down to is the people you acquire. The balance sheet is just a paper transfer. The best acquisitions happen when you really get great people to come with them. Baggallini brought us people with great expertise that helped us in our other businesses, and our other businesses have helped them. There’s been some real crossover pollenization.

So no plans to leave Columbus any time soon?
Actually, now that I have been president of publicly held companies for more than 14 years (Phoenix Footwear Group prior), when my friends ask what do I want to do when I grow up, my answer is, “I want to be president of a privately held company because I think that’d be fun.” And you can print that because I joke about it all the time. I just got done with my 58th conference call with Wall Street and it’s getting more and more cumbersome to run a company in the public markets. But, at the same time, I have a great board of directors who run the governess of the company and allow us to manage it. And as long as they are allowing me the flexibility and opportunity to acquire more companies, which I enjoy doing, then I’m in a really good place. Where can you go where they let you manage the business and allow you to take the profits of the company and acquire more companies to grow further? Look at the footwear industry and ask how many companies are doing that—it’s a handful.

The other thing that is interesting is about Columbus itself. When I moved from the West Coast, a lot of my friends wondered how I would be able to survive. [You] can’t surf on a lake… But Columbus, between Victoria’s Secret, DSW, Abercrombie & Fitch, Lane Bryant, The Limited, RG Barry and now Eddie Bauer, has become quite the retail hub. When we look for designers, operators, merchandisers, etc. there’s a lot of talent in this town. We’ve been able to hire some people who have worked at billion dollar brands.

What do you love most about your job?
Getting to help our brand presidents and people in the company accomplish their goals. I get the chance to give them the resources and share with them all the mistakes I have made in my career so they don’t have to go through them. The ability to watch people come into our organization, become a part of the culture and then watch them thrive is rewarding as hell. And, to this day, I still get [excited] by the fact that we actually create products, bring them to market and then get phone calls when they sell well. I get to be help in that whole process and that’s great stuff.

It’s why you do what you do.
At the end of the day I’m a merchant, and that’s what I love to do.

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