For Sunglass Hut, 1996 was a bad year. Until then, the multi-million dollar sunglass specialty store dominated the plano sunwear market with stand-alone stores and kiosks opening up all over the world. It even made inroads into the prescription sunwear market with the launch of its eyeX stores in late 1995. Comparable store sales were on an upward climb, and its stock was one the most coveted listings on Wall Street.

But the clouds rolled in over the Hut in 1996. According to an Eyecare Business report, its stock [Nasdaq: RAYS] enjoyed a 52-week high of 36 in March, but then fell below $10 per share by November as the specialty store missed sales expectations each quarter. The problem, according to many industry experts, was associated with mismanaged inventories: manufacturers introduced an enormous amount of new product, and the retailer overestimated sales expectations. It eventually led to a vicious cycle of consumer dissatisfaction, inventory back-up, and product mix imbalance.

The fall was culminated in mid-1997 with the resignation of Jack Chadsey, the firm's president and chief executive. The slot was filled temporarily by the company's then 38-year-old chairman, James Hauslein, until the board found a permanent successor.

While it was looking grim for Sunglass Hut, this all presented a big opportunity for optical retailers and dispensers to grab more of the sunwear market. In fact, optical garnered 31 percent of the plano market share in 1996 as compared to sunglass specialty's 19.7 percent. Experts warned, however, that "Sunglass Hut is pulling out all stops to turn this around." And that's exactly what they're trying to do. In 1997, sunglass specialty gained on optical with 21.5 percent market share, compared to optical's 29.8 percent.

STEP ONE

"We basically cleaned house in 1998," says chairman Hauslein, referring specifically to paying off all of its outstanding debt, reassessing and streamlining its assortment of sunglass brands, closing 149 unprofitable stores (with plans to close 76 more by the end of January), discontinuing its eyeX concept, and realigning 85 percent of its management team. The most notable addition was John Watson, a marketing veteran from Reebok, to the presidency, a seat that was vacant for six months.

"We've made real tangible progress," adds Hauslein. "Unfortunately, that progress hasn't shown up in comparable store sales yet." For the four weeks ended October 31, sales were $30.5 million, a decrease of 1.9 percent. Comparable store sales for the same period decreased 3.6 percent. Sales for the third quarter increased only 0.4 percent to $122.8 million from $122.4 million, and comparable store sales decreased 0.5 percent. Things were beginning to look up during the holiday season. Sales for the four weeks ended November 28 increased 2.4 percent for the same period last year.

The Hut's stock price looks no better. At press time, shares sat at a low 5-1/2, and several brokerage analysts lowered their earnings outlooks for Sunglass Hut, changing its rating from a "strong buy" to a "buy." Still, the Hut's board of directors recently authorized the repurchase of up to an additional 8 million shares of Sunglass Hut's outstanding common stock, which is in addition to previous authorization of the repurchase of 7.5 million shares. Commenting on this action, Hauslein says, "Our stock has really been beaten up in the last year. We think it's dramatically undervalued, and we believe that, at recent prices, the shares are an attractive long-term investment for the company."

Maureen McGrath, who monitors sunwear stocks as vice president of research at Smith Barney in Manhattan, had this to say about the Hut's stock: "Sales have certainly been disappointing recently, and the earnings growth has been elusive, but they've made some very positive changes, and hopefully it will soon turn things around for them."

MIXING IT UP

Recognizing that inventory overload was one of its incremental problems, the retailer completely overhauled its buying approach and cut its number of vendors virtually in half. According to its 1997 annual report, its goal by the end of that year was to hone down its number of vendors from 55 to approximately 30, to narrow its brand assortment from 115 to around 60, and to cut down the number of SKUs that was between 850 and 1,000 to 550-750. According to the retailer, it has reached these goals.

"We are sharpening our focus and buying deeper into our brands while maintaining total coverage of a very broad consumer group," says president Watson. "We are constantly reviewing our brand assortment mix and aggressively editing and rebalancing as necessary."

With its vendors, the retailer thinks of itself as having partnerships. "In many cases, we're the first to introduce product for vendors so that we can test market the styles," says Watson. "We access sales everyday to see what SKUs are selling in terms of colors, styles, shapes, etc. This is valuable information for vendors."

For many sunglass vendors, Sunglass Hut is--or was--their biggest customer. When the retailer began focusing its product mix vendors clamored for a spot on this most coveted frame board. Among those on the list: Luxottica, Marchon, Bausch & Lomb, Oakley, Maui Jim, and Viva. The challenge for these vendors, however, is to stay on the edge without falling off. "We are committed to maintaining strict inventory," says Watson.

In fact, Bausch & Lomb, maker of Ray-Ban, Revo, Liz Claiborne, and Killer Loop, refers to "unexpected cutbacks in orders by Sunglass Hut" in a press release that explains the possibility that it may sell its premium eyewear business to focus on eye health care. The company reports that it hasn't turned a profit recently.

As part of this "partnership," Sunglass Hut vendors are expected to do their share of marketing to the consumer. "There are major marketing deficiencies in this industry," says Hauslein. "We have dramatically increased our marketing budget, but we're asking from support from our vendors.

"Take the sneaker industry, for instance, to which the sunwear market has often been compared," adds Hauslein, and ironically--or not so ironic--the industry from which the Hut's new president comes. "Sneaker vendors support their retailers by getting the message to the consumer and creating demand." Both Hauslein and Watson refer to alternative products as their biggest competitors, including sneakers, apparel, and CDs, saying: "We, as an industry, need to convince the consumers to spend their money on sunwear."

SPREADING THE WORD

For its part, Sunglass Hut is using two approaches to reach the consumer: in-store merchandising and consumer advertising.

First, the retailer revamped its in-store displays to emphasize three main product areas: fashion, function, and sport. "This will simplify the customer's shopping experience," says Watson.

Plans to create "more visual excitement," according to Watson, include monthly change of signage, re-setting of merchandise, and moving display cases.

Second, the retailer's national advertising campaign, "Gotta Have a Look," was launched in major consumer publications this summer. According to Watson, it's too early to judge the campaign's effectiveness.

Most recently, the Hut launched a major cross promotion with BMG Entertainment to offer consumers an exclusive compilation CD featuring seven Jive and Silverstone artists, including an exclusive track from the newest Top 40 sensation, Britney Spears. With this promotion, which began in November, consumers receive a free copy of "Hot Music CD" with any purchase of $79.99 or more.

With its new infrastructure intact, debt paid, and marketing plan in place, says Hauslein, "it basically comes down to sales and getting customers into our stores." EB