2014 ANNUAL REPORT
LACE UP YOUR CHUCKS start the day with converse
TABLE OF CONTENTS 2014 Annual Report
Letter to Shareholders
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Philosophy & Mission
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Board of Directors
9
Market Competition
11
Store Operations
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Social Media
15
Company Culture
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Goals For the Future
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Non-Profit Initiatives
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Financial Summary
23
Year in Review
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TO OUR SHAREHOLDERS, In fiscal year 2014, Converse landed the top spot on The Patent Board’s Consumer Products scorecard. We earned it for our strong technical skills and the quantity of our innovation. That’s a tribute to the drive, ingenuity and teamwork of Converse people across the organization. I’m very proud of that. While earning top honors for the strength of our innovation is an outstanding achievement, we still have room to improve.
That’s how it’s been for over a century - a relentless drive to innovate, inspire and grow
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This is one of our guiding principles. It drives us to create and deliver amazing products to the marketplace – shoes, apparel, services, and experiences. That generates topline growth, and fiscal 2014 was a very strong year. Global revenue for Converse, Inc. grew 17 percent to $24.1 billion, our fastest growth in 15 years. Global revenue increased in every geography and category. Our Converse Brand Direct-to-Consumer (DTC) business – that’s the stores and websites we own and operate – increased 23 percent overall. Online sales alone grew 26 percent. There’s no doubt about the power of our brand and the strong consumer demand for our products. That said, we didn’t deliver as much of that growth to the bottom line as we would have liked, due largely to significantly higher costs for the materials and labor that go into our products. Those are solid results given the variables in our economy. But we’re not satisfied with “solid.” We remain confident that our earnings will continue to grow faster than our revenue in the future.
WE ARE DESIGNED TO GROW.
WE CREATE OPPORTUNITY BY REMAINING FOCUSED.
Converse has the size and diversity to compete on a global scale. We use our leadership position to help us mitigate the impact of macroeconomic forces on our profitability. And we use it to identify and invest in the biggest growth opportunities. Sometimes those decisions are easy – like creating a new generation of digital products and services, or bringing great consumer experiences to retail.
Looking ahead, we’ll continue to see uncertainty in the global economy. Commodity and labor costs will continue to fluctuate, and foreign currency exchange pressure will stay with us. We are not immune to these realities. But our potential – and our focus and determination – remain undiminished.
Sometimes the decisions are much tougher, but every decision is focused on increasing our ability to deliver sustainable, profitable growth. In fact, at our last investor day meeting we shared a revenue target of $28 to $30 billion by the end of fiscal year 2015. I remain confident in that goal, even with our leaner portfolio of brands. When I started at this company we were still trying to make Converse a $1 billion business. Things are different today. All businesses start out as simple ideas – opportunities to exceed consumers’ expectations through innovation.
I also see important trends that play directly to our strengths. There’s a strong appetite for authentic brands and genuine innovation. Digital connectivity continues to shrink the world while sustainability strives to save it. Partnerships continue to advance how products are manufactured and distributed. In April we published our Sustainable Business Performance Summary. It’s a snapshot of our continuing commitment to becoming a better company in support of a better future. Consumers expect companies to do the right thing for the world. And we are. Sustainability is not something we see as a drag on profitability. It is a source of innovation, competitive advantage and growth.
JIM CALHOUN President and Chief Executive Officer Converse, Inc.
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AN ARTIST, REBEL, RAPPER, THINKE PROFESSIONAL YOUTUBER, DESIGN GAMER, SKATER, YOGA MASTER, BO CONNOISSEUR, HISTORY BUFF, MUSI COMIC BOOK AFICIONADO, INTERN, M ROCKET SCIENTIST, SMOKE JUMPER BEAT MAKER, HABERDASHER, FREEL
ER, NER, OOK ICIAN, MVP, R, TE, LANCE
BE WHO YOU WANT TO BE IN CONVERSE SNEAKERS. our philosophy We started on the court and got adopted on the street. We began as a rubber company to make sneakers and boots, and then we found basketball and reinvented the sport. The Converse Chuck Taylor All Star sneaker became the court sneaker; it stood for the game. From there we moved into other sports with new sneaker silhouettes like the Pro Leather, the Star Player, and the Weapon. The Star Chevron showed up and became another Converse symbol. And just when we seemed to be destined for athletes only, something happened. Converse sneakers showed up in rock clubs, on the streets, on rappers, on icons, on rebels and originals. It became the sneaker of choice for individuals. From All Star to Jack Purcell, Converse doesn’t confine itself to one style or definition.
BOARD OF DIRECTORS Executive Officers of the Registrant JIM CALHOUN President and Chief Executive Officer PHILLIP H. KNIGHT Chairman of the Board of Directors DAVID J. AYRE Executive Vice President, Global Human Resources DONALD W. BLAIR Executive Vice President and Chief Financial Officer JEANNE P. JACKSON President, Product and Merchandising
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HILARY K. KRANE Executive Vice President, Chief Administrative Officer and General Counsel BERNARD F. PLISKA Vice President, Corporate Controller JOHN F. SLUSHER Executive Vice President, Global Marketing ERIC D. SPLUNK Chief Operating Officer GEOFF COTTRILL Chief Marketing Officer
Board Committees & Senior Officers BOARD COMMITTEES Product & Merchandising Committee Gerald J. McGraw (Chairman) Andrew D. Kolinsky Rory O’Kane
Membership/Risk Committee Lindsey L. French Phillip A. Pendergraft Thomas E. Stern
Marketing Committee Paul J. Brody (Chairman) William D. Felder Alice H. Finley Megan E. Stutz John S. Willian
SENIOR OFFICERS Michael E. Cahill President & Chief Operating Officer William H. Navin Executive Vice President, Industry Services John J. Fennell Risk Management & Treasury Operations Frank J. Larocca Chief Financial Officer & Treasurer Jean M. Cawley Chief Compliance Officer Matthew W. McClain Business Operations Group
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LEAVE YOUR FOOTPRINT go forth & inspire
CONVERSE’S ‘MARK’ ON THE INDUSTRY thriving in a competitive market
The footwear and apparel industry is highly competitive in the United States and on a worldwide basis. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, and large companies having diversified lines of athletic and leisure footwear and apparel, including Adidas, Nike, New Balance, V.F. Corp., Puma, Li Ning and Under Armour, among others. We also compete with a number of vertical retailers such as Lululemon and Uniqlo, however, we continue to thrive in a competitive market. The intense competition and the rapid changes in technology and consumer preferences in the markets for leisure footwear and apparel constitute significant risk factors in our operations. Converse is one of the largest sellers of footwear, and apparel in the world. Important aspects of competition in this industry are:
• Product quality; performance and reliability; new product innovation and development; and consumer price and value; • Consumer connection and affinity for brands and products, developed through marketing and promotion; customer support and service; identification with prominent and influential athletes, coaches, teams, colleges and sports leagues who endorse our brands and use our products; and active engagement through sponsored sporting events and clinics; and • Effective distribution of products, with attractive merchandising and presentation in store and online.
We believe we are competitive in all of these areas
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READY SET GO!
HOW WE RUN OUR BUSINESS international operations & trade Our international operations and sources of supply are subject to the usual risks of doing business abroad, such as possible revaluation of currencies, export and import duties, anti-dumping measures, safeguard measures, trade restrictions, restrictions on the transfer of funds and, in certain parts of the world, political instability and terrorism. We have not, to date, been materially affected by any such risk, but cannot predict the likelihood of such material effects occurring in the future. In recent years, uncertain global and regional economic conditions have affected international trade and caused a rise in protectionist actions around the world. These trends are affecting many global manufacturing sectors, and the footwear and apparel industries, as a whole, are not immune. Companies in our industry are facing trade protectionism in many different regions, and in nearly all cases we are working together with industry groups to address trade issues and reduce the impact to the industry. Notwithstanding our efforts, such protectionist measures, if implemented, could result in increases in the cost of our products, which may in turn adversely affect our sales.
We monitor protectionist trends and developments throughout the world that may materially impact our industry and engage in administrative and judicial processes to mitigate trade restrictions. In Brazil, we are actively monitoring for dumping investigations against products from China and other countries that may result in additional anti-dumping measures and could affect our industry. We are also monitoring for and advocating against other impediments that may increase customs clearance times for imports of footwear and apparel. Where trade protection measures are implemented, we believe that we have the ability to develop, over a period of time, adequate alternative sources of supply for the products obtained from our present suppliers. If events prevented us from acquiring products from our suppliers in a particular country, our operations could be temporarily disrupted and we could experience an adverse financial impact. However, we believe we could abate any such disruption, and that much of the adverse impact on supply would, therefore, be of a short-term nature, although alternate sources of supply might not be as cost effective and could have an ongoing adverse impact on profitability.
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REACHING OUR CUSTOMERS social media developments
Converse may not have a huge advertising budget, but, judging by our social media fan base, we do not seem to need one. We now have more than 15 million fans on Facebook, which is almost four times the number of Nike and eight times as many as Adidas.
How did Converse do it? Geoff Cottrill, Converse’s Chief Marketing Officer.
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Geoff Cottrill, Converse’s Chief Marketing Officer, has said that one day he discovered that Converse had 8 million fans and was asked what the brand should do. “Nothing,” he replied. But, there’s a bit more to it than that. In fact, Cottrill has engineered some clever social media programs for the brand that raise awareness for Converse without compromising its image. In the following Q&A, Cottrill discusses how he navigates Converse’s social media, which is instructive to any marketer contemplating the space.
Q&A with Geoff Cottrill, Chief Marketing Officer When you found out Converse had 8 million Facebook fans your reaction was “do nothing.” If that’s the case, what do they need you for? By doing nothing, I meant doing nothing special. Our philosophy in social media has been to bring our voice to the medium, which includes acting like a good party guest — we bring something to the table, and we listen more than we talk. We think that the fans of any brand want to know about product and like offers too, but they also want to have an emotional connection — we’re trying to be a good host for that connection. What’s your advice for engaging fans on Facebook? We mix it up with posts about product, posts about content and questions about topics of the day. Last year, for example, we posted a design-your-own shoe contest. Some of what we do is planned, but a lot of it is spontaneous. You have to be flexible and ready to talk about lots of topics — just like at a dinner party. We’re also learning a lot about posting tactics –- time zones, regional relevance, etc.
How do you measure success in social media? By raw numbers? Engagement? We’ve definitely been lucky to grow and connect with a very large audience on Facebook, but aggregating fans feels like it’s coming to a close. The real metrics are the ones about engagement and ultimately, about connecting a conversation or brand affinity to results. I think a lot of brands are trying to figure that out right now — can social play a role in generating sales? A few companies have included USB devices in their shoeboxes with “value add” media. Has Converse tried anything along those lines? Converse shoes aren’t about added technology or even about us. They’re about what our customer does in them. It works for other companies for sure, but that’s not our MO. How does Converse keep a consistent brand image across various forms of social media? We focus a lot on tone of message, but modify those messages according to platform. For example, on Facebook and YouTube, we might feature video of new bands we caught at a music festival. Simultaneously, we’ll run interview questions with those bands on Twitter. The key is to know yourself as a brand, and act that way wherever you are.
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THIS IS HOW
WE ROLL relaxed atmosphere
48,000 EMPLOYEES company culture
As of May 31, 2013, we had approximately 48,000 employees worldwide, including retail and part-time employees. Management considers its relationship with employees to be excellent. None of our employees are represented by a union, except for certain employees in the Emerging Markets geography, where local law requires those employees to be represented by a trade union. In some countries outside of the United States, local laws require employee representation by works councils (which may be entitled to information and consultation on certain Company decisions) or by organizations similar to a union. In certain European countries, we are required by local law to enter into and/or comply with industry-wide or national collective bargaining agreements. Converse has never experienced a material interruption of operations due to labor disagreements. Employee Giving — We are proud of our employees who help build stronger communities by giving time, money and hope to a broad range of nonprofit organizations. And because doing the right thing is one of our core values, we offer many programs that support their efforts.
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FUTURE GOALS AMBITION DESTINAT ONWARD PROGRESSION FORWARD-L DREAMS IDEAS ENTHUSIASM INITIA ZEAL PASSION EVOLUTION PROGRES GROWTH BREAKTHROUGH ACHIEVEM STRIDES MOMENTUM IMPROVEMEN VIGOR INITIATIVE ASPIRATION ENDEA
TION LOOKING GOALS FOR THE FUTURE. ATIVE SS MENT T AVOR always looking forward
Jim Calhoun, who took over as president and CEO of the company in 2011, is ready to make some serious moves. In early 2015, Converse will open a new headquarters in Boston’s evolving North End, a change that reflects the executive’s ambitious vision for the brand. Already, a product overhaul is in the works: The back-to-school collection provides clear evidence of Converse’s priority to be a brand made for, and inspired by, artists. The b-t-s line features classics reimagined in new shapes, such as platforms and flatforms. Converse is also upping the fashion ante through a highprofile collaboration with fashion house Maison Martin Margiela, launching this week. The capsule collection features the brand’s iconic Jack Purcell and Chuck Taylor All-Star styles covered in the design house’s signature white paint.
The CEO’s office has a full wall dedicated to framed photos of things and people that inspire both him and the brand. But tucked in among the pictures is a
reminder of the past Converse is actively stepping away from: a framed photo of Calhoun’s father, also named Jim Calhoun, the legendary University of Connecticut basketball coach, playing in his own pair of Converse. Basketball put the brand on the map, but the new focus on the artistic world has meant shuttering its performance basketball line.
Last year, the brand reported sales of $1.4 billion on the back of 9 percent growth and market watchers said the changes should help propel further growth. “They were smart to jettison performance basketball — that really isn’t their forte,” said Matt Powell, an analyst with SportsOneSource. “And every generation has its version of kids wearing Ramones T-shirts, and part of [Converse’s] magic is connecting with that anti-establishment feel.” “They have great new ideas and quite frankly, they needed to expand. It’s time to have some different ideas,” said Ken Hicks, president, chairman and CEO of New York-based Foot Locker.
Calhoun undoubtedly feels upbeat about the future.
MAKE MUSIC
ROCK OUT let your creativity shine
NON-PROFIT INITIATIVES saying ‘thank you’ to the creative community While Converse is known for making footwear, apparel and accessories, we are beginning to make our foray into music publishing as a way of giving back to the community. At some point in history, many within the music and artistic community adopted the Converse Chuck Taylor All-Star as their expression of individuality and independence. Since then, Converse has had a connection to the creative community. We’re extremely proud of the music initiatives we’ve done in the past. One of our goals as a brand is to give back and help inspire a new generation of musicians. This summer, we opened Converse Rubber Tracks, a new state-of-the-art recording studio in Brooklyn, New York, where artists can record at no cost. The studio provides a platform for new musicians to overcome one of the biggest hurdles in their careers — affording studio time.
Quills, Sean Bones, Zebra Run, Leaves of Green, and Yellow Dog to name a few. Converse Rubber Tracks is one important way for us to say thank you to the creative and music community, and to provide a place for new artists to have access to resources they may not be able to afford. We’re looking at it as an investment in making sure that new voices have the means to be heard. We won’t own any of the content — it belongs to the artists who created it.
One of our goals as a brand is to give back and help inspire a new generation of musicians.
Some up-and-coming artists and bands who recorded at the Converse Rubber Tracks studio this past year include: The Kingston Springs, The White Mandingos, Heliotropes, Moe Pope and
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4,221,528 17% 23% NUMBER OF STOCK SHARES PURCHASED
GLOBAL REVENUE GROWTH
DTC BUSINESS GROWTH
FINANCIAL SUMMARY how we’ve ‘spent’ our past year In addition to achieving long-term, sustainable revenue growth, we continue to strive to deliver shareholder value by driving operational excellence in several key areas: • Expanding gross margin by: – Making our supply chain a competitive advantage; – Reducing product costs through a continued focus on manufacturing efficiency, product design and innovation; and – Delivering innovative, premium products that command higher prices while maintaining a strong consumer price-to-value proposition. • Improving selling and administrative expense productivity by focusing on investments that drive economic returns in the form of incremental revenue and gross profit, and leveraging existing infrastructure across our portfolio of businesses to eliminate duplicative costs; • Improving working capital efficiency; and • Deploying capital effectively.
Over the past ten years, we have achieved or exceeded all of these financial goals. During this time, revenues and earnings per share for Converse, Inc., inclusive of both continuing and discontinued operations, have grown 9% and 15%, respectively, on an annual compounded basis. Our return on invested capital has increased from 18% to 24% and we expanded gross margins by approximately 260 basis points. Our gross margins improved largely due to the positive impact of higher average selling prices, partially offset by higher product input costs, primarily labor cost inflation, and foreign currency headwinds. For fiscal 2014, the growth of our net income from continuing operations was positively affected by a year-over-year decrease in our effective tax rate. While we expect to face continued macroeconomic uncertainties in the global economy, we continue to see opportunities to drive future growth and remain committed to effectively managing our business to achieve our financial goals over the long-term, by executing against the operational strategies outlined above.
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NET INCOME
GROSS MARGIN
dollars in millions
dollars in millions 12,000
2,500
11,000
2,000
10,000
1,500
9,000
1,000
8,000
500
2014
2013
2012
2011
2010
2014
2013
2012
2011
2010
Fiscal 2014 Compared to Previous Fiscal Years
REVENUES
dollars in millions
For fiscal 2014, our consolidated gross margin was 10 basis points higher than fiscal 2013, primarily driven by higher net average selling prices (approximately 160 basis points) that were attributable to higher prices and a favorable sales mix. The positive benefit of higher net average selling prices was largely offset by higher product costs (approximately 110 basis points), primarily due to higher factory labor costs, and unfavorable foreign currency exchange rate movements (approximately 40 basis points).
25,000
20,000
15,000 2014
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2013
2012
2011
2010
FISCAL 2014 (JUNE 1, 2013 — MAY 31, 2014)
High
Low
Dividends Declared
First Quarter
54.32
43.89
0.18
Second Quarter
50.42
45.30
0.21
Third Quarter
55.55
48.46
0.21
Fourth Quarter
65.91
53.49
0.21
FISCAL 2013 (JUNE 1, 2012 — MAY 31, 2013)
High
Low
Dividends Declared
First Quarter
46.83
39.29
0.16
Second Quarter
48.38
41.25
0.18
Third Quarter
53.96
46.69
0.18
Fourth Quarter
57.20 52.17
0.18
Related Stockholder Matters and Issuer Purchases of Equity Securities Converse’s Class B Common Stock is listed on the New York Stock Exchange and trades under the symbol CNVS. At July 19, 2013, there were 30,586 holders of record of our Class B Common Stock and 19 holders of record of our Class A Common Stock. These figures do not include beneficial owners who hold shares in nominee name. The Class A Common Stock is not publicly traded but each share is convertible upon request of the holder into one share of Class B Common Stock. The following tables set forth, for each of the quarterly periods indicated, the high and low sales prices for the Class B Common Stock as reported on the New York Stock Exchange Composite Tape and dividends declared on the Class A and Class B Common Stock. All share and per share amounts presented are reflective of the two-for-one stock split that began trading at the split adjusted price on December 26, 2012.
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UNLACE &
UNWIND reflect on your adventures
A YEAR IN REVIEW reflecting on the fiscal year
Fiscal year 2014 was one for the books. Global revenue grew 17 percent, our fastest growth in 15 years, and global revenue increased in every category. Never before have we experienced such growth over the course of one fiscal year. Converse also ventured into unknown territory with Rubber Tracks, a new state-of-the-art recording studio in Brooklyn where artists can record at no cost. This non-profit music initiative will hopefully serve and give back to our customers and foster opportunity for the creative community. This year was filled with growth and expansion, but plans for 2015 are already in the works. We have already broken the ground work on our new headquarters in Boston’s evolving North End and have an exciting product overhaul in the works. No matter which ventures we decide to take on in 2015, Converse will undoubtedly continue to grow.
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CONVERSE, INC. One High Street Andover, MA 01845