M & A Roundup – Sunglass Hut Expands Its Watch Retailing Operations: The Company Continues to Leverage Its Expertise In Retailing of Popular-Priced Fashion Accessories

Sunglass Hut International, a leader in specialty niche retailing, has grown over the last decade from a North America-based retailer of premium sunglasses into an international operation with a core competency in small-store retailing of popular-priced sunglasses and watches. It has been steadily consolidating the sunglass market – expanding from 90 stores a little more than a decade ago to almost 1,500 Sunglass Hut locations today – and its recent acquisition of Watch World Inc. not only increases the company’s critical mass in its watch business but further consolidates that market as well. Watch World, based in New York, is a national chain of 119 specialty stores and operator of the WatchWorld.com web site. Coral Gables, Fla.-based Sunglass Hut has 1,867 stores, including 1,494 Sunglass Hut locations, 110 Watch Station stores, and 263 combination sunglass and watch stores around the world, located in a wide variety of high-traffic shopping and tourist destinations. Sunglass Hut sales for the trailing four quarters through April 29 were roughly $635 million. For the 12-month period ended January 29, Watch World had sales of about $42 million. James Hauslein, chairman of Sunglass Hut, says that his company’s decision to add watch businesses to its portfolio was a natural extension of its sunglass-only operations, a product category that would leverage the company’s expertise in “small-square-foot-store” retailing of popular-priced fashion accessories. “We do not have big stores. We have a lot of small stores, but I would argue that it is, in many ways, a harder business to run than an operation with larger stores because you have to use technology and systems more effectively,” he remarks. Additionally, the consumers for both sunglasses and watches are very similar, he comments, and therefore the company “can leverage off a lot of common characteristics, which are very similar price points, similar lifestyle uses, similar fashion perspectives, and similar designer brands,” he says. For example, the company sells both sunglasses and watches by Nike, Kenneth Cole, Oakley, and DKNY, in addition to many other brands for both products. Sunglass Hut characterizes non-prescription, premium sunglasses and popular-priced watches as “mainstream lifestyle fashion accessories,” because of their pricing and lifestyle uses. “They’re bang-around accessories, things that you would wear to the beach, for example, as opposed to an expensive watch,” he says. The target consumer that Sunglass Hut is going after generally is younger – 18 to 35 years old – fashion-conscious, and has an active lifestyle. “So, our products can be viewed as fashion accessories and/or a lifestyle-rugged accessories. This represents kind of a dual channel for us. The line between the two does blur a lot, but together they tend to define a large segment of our population.” When looking to expand into new product categories, Hauslein says that even though his company operates smallish stores, it is not limited by the size of the products that it would consider selling. “What we are really looking at is what is compelling in our fashion accessory statement. When you go into our combo stores, which sell both watches and sunglasses, the two products really play off each other, not only from the consumer’s perspective but also from our sales associates’ perspective,” he comments. Opportunities to leverage many capabilities At the end of the day, a pair of sunglasses must look good on the consumer’s face, he explains, but since a segment of his company’s consumers is very technologically aware, the sales people have to be knowledgeable enough to address those customers’ questions. “Some customers come in, try on a watch, and say, I’ll take it.’ Others come in and ask, What are these 12 buttons on the watch for?’ Our sales associates know how to answer those types of questions,” he says. “When we made the decision to add watches to our product line, we be-lieved it was a category that we could leverage from an internal perspective as well as an external perspective. Our employees were already used to learning detailed product knowledge regarding the technology-based features and benefits of our sunglasses. The addition of watches leveraged off the mind-set of our sales associates in a very effective way, plus it also gave them something to sell on a rainy day!” he explains. In addition to the company’s sunglasshut.com web site, which sells watches and sunglasses in North America and mirrors Sunglass Hut’s strategy in its physical stores, the company also operates a web site called shades.com, which sells sunglasses but is not linked to the company’s physical store environment. Shades.com, he says, gives his company the flexibility to test new strategies over time that “will in no way contaminate our basic brand equity.” Although he did not offer many specifics on the growth prospects for the watch and sunglass businesses, Hauslein said that his company “feels comfortable” with Wall Street’s expectations for the growth rates for the year. “In 1999, we had comps of 6.8%, and our combo stores comp at a rate significantly higher than that. Our near-term strategy over the next two or three years is to convert an increasing number of stores to the combo format.” In the watch business, he adds, technology is going to become more and more important, and will become a huge driver for his company’s business. Two years from now, he states, consumers will be able to use their watches as cell phones and will also be able to receive e-mail on them. This converging technology, he thinks, will transform the traditional watch business. “We think we are going to be in the middle of a significant evolution in the popular-priced watch business. We don’t need advanced technology to be successful, but if technology creeps into our business, it’s just going to bring us new customers.”