A Slippery Slope For North Face

Going mainstream could alienate its core customers

James Fifield is doing his best to look the part. Dressed in a fleece vest, the 56-year-old chief executive of outdoor-gear maker North Face Inc. props his feet on his desk in his temporary headquarters, a circle of trailers in rural Colorado. But peeking through his outdoorsy veneer is a silver bracelet watch and funky French eyeglasses--hints of the fast lane the former CEO of EMI Music drove out of when he took over North Face five months ago. "It was a chance to make my avocation my vocation, to work for the company which makes the clothes I live in on the weekends," says the Colorado native of his return from New York.

For the man who helped sell America's teens on the Spice Girls, North Face is one more exercise in mass marketing. The beat that now drives Fifield: broadening the appeal of North Face's high-performance outdoor clothes to mainstream America. In recent years, the brand has caught on with the Range Rover yuppie set and fashionable urban kids. The question is whether Fifield can capitalize on the shift without alienating the outdoor retailers and rugged hobbyists on whom North Face has long depended. "They have the potential to be the dominant high-end equipment and apparel brand, but there is a risk of diluting their franchise," warns Morgan Stanley Dean Witter analyst David Griffith.

Potential, yes--but can Fifield and North Face live up to it? Despite seemingly strong growth--Griffith expects sales to increase 23% this year, to $256 million, while net earnings before charges should grow 27%, to $14.1 million--Wall Street is worried. Since Fifield took over, the stock has skidded from 26 to 9 1/2, before recovering recently to 13. Erratic cash flow due to seasonality and mounting receivables made the stock a short-seller pick; investors also question Fifield's costly decisions to move the company headquarters and to expand into footwear with the $10 million purchase of boot maker La Sportiva. "That made some investors nervous," says Robert P. Fetch, a partner at Lord, Abbett & Co., one of North Face's largest investors. He believes the moves will pay off.

Still, few would dispute the strategy: the outdoor look is hot. And North Face is moving from the $5 billion specialty outdoor market to the broader $30 billion casual sportswear market. "There is a big change in lifestyle toward outdoor leisure, and we are perfectly positioned," says Fifield.

But he also has plenty of problems to overcome. Brought into and out of bankruptcy in the early 1990s by Fifield's predecessor, William Simon, North Face's stock has been erratic. Fifield joined the board in 1996, and after he was passed over for the top job at EMI, Simon grabbed him. "To have a guy like this come into this parochial, inbred industry is a remarkable opportunity," says Simon.

Today, Fifield is North Face's largest shareholder, and despite an almost $6 million decline on his initial $15 million holding, he hasn't become cautious. Within months of taking over, he announced a radical relocation from San Francisco to Carbondale, Colo., a half-hour from his Aspen home. The CEO says the move puts employees into the environment they're designing for, but it cost $6 million. And the company had to replace half its U.S. workers.

Even more controversial is Fifield's plan to grow the number of stores selling North Face after 2001--from 1,500 specialty stores up to 4,000 retailers, including some it would never have talked to a few years back, such as Nordstrom and Foot Locker. For most consumer products, that would be good news. But for North Face, it's a double-edged sword. Though sales will increase, particularly among the inner-city kids who have made its down parkas into a trend, the specialty stores that stock North Face are increasingly upset.

The reason: They fear that willy-nilly expansion will undercut the brand. Popular Mountain Light jackets, normally $345 a pop, have started showing up at low-cost outlets for as little as $230. The specialty retailers also complain of arrogant moves like North Face's opening company-owned outlets without much notice. "If they pollute the brand, we'll cut back on it," says John Mead, president of Adventure-16, a San Diego-based chain of outdoor stores. Already, A-16 is stocking more competing brands.

Some friction with retailers, Fifield says, is inevitable. "Retailers love to see the status quo," he says. Moreover, analysts attribute North Face's high receivables to the favorable payment terms it has given many small retailers in a drive to boost sales. They say the problem will improve as more sales come from bigger chains. And so far, North Face's core consumers appear to be on his side. Janine Silberman, a Los Angeles-based climber who is planning a trip to Kilimanjaro, says North Face remains her favorite. "As long as I'm getting safety and warmth, and the colors are easy to see, I'll buy it," she says.

Still, to keep the restive retailers on board, Fifield intends to tighten inventory controls so products can't be diverted to discounters like Costco Wholesale; inventory and delivery systems are being upgraded. Fifield also insists he will carefully differentiate between retailers. Lower-price goods with fewer features will go to the mass-retailing chains. High-tech tents, Himalayan climbing suits, and all other serious equipment will go exclusively to the speciality retailers.

The activewear business is littered with companies, such as Fila Holdings, that have lost their faithful by trying to expand too quickly. Can Fifield do better? He confidently predicts sales will double in three years and margins will grow from 10% to 14%. "I was hired to take North Face to tHe next level," he says. So far, it's been a tricky climb.

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