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REI confident it will rebound from losses

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SEATTLE — Recreational Equipment Inc.'s Dennis Madsen worked his way from stocking shelves in the outdoor gear retailer's first Seattle store to running the company, only to deliver some of the company's worst news: the first profit loss in its 62-year history.

The Kent-based cooperative says the loss was necessary to put into motion a long-term survival plan that includes a dominant Internet presence and a Japanese unit. The company insists it will be back in the black by the end of this year.

"There are no plans to have a repeat of what we had in 2000," said Madsen, who became president and chief executive officer a year ago.

Analysts agree it was a gamble worth taking but say the path to profitability won't come without significant changes to REI culture.

"I think they've gone from being a cooperative to being a business operation," said Michael Hodgson, co-publisher of Specialty News, an outdoor-industry magazine. "Now, is that good or bad?"

For 2000, REI lost $11.4 million, compared with a profit of $10.4 million the year before. In a year of belt-tightening, the company also laid off 52 of its approximately 7,000 workers and closed Thaw, a Seattle clothing subsidiary that employed about 200 people.

The losses, and the layoffs, were due in large part to a long-held goal to, as Madsen said, "be the last man standing within outdoor recreation on the Internet."

That sounds like quite a different philosophy from a slow-growing cooperative that got its start from selling ice axes through the mail before moving into catalog and later store retail.

But so far, the new philosophy appears to be paying off.

As other online outdoor retailers fail, analysts applaud REI for making a Web site that builds on what it offers in its stores — strong selection and product knowledge.

They also say the company has done a good job of using its Web presence in its brick-and-mortar business. REI added Internet kiosks to give store shoppers a wider selection and is using the Internet to simplify internal ordering and delivery.

"From a strategy perspective, REI is the poster child for a retailer who understands how to integrate the online and the off-line world," said Carrie Johnson, an e-commerce analyst with Forrester Research.

Researchers at Gomez Research, which tracks e-commerce trends, recently gave REI's Web sites top-10 ratings in both apparel and sporting goods.

"REI has really positioned themselves for the long haul," Gomez analyst Barrett Ladd said.

Madsen said REI is already exceeding its financial goals this year and is confident that the Web site — and the company — will be profitable in 2001.

REI's Japanese unit, which opened in 2000, will likely not see a profit for years, but that is typical for such international expansion, said chief operating officer Sally Jewell.

REI is still fine-tuning that unit, she said. It has learned, for example, that car racks aren't a big seller in Japan, where many cars are sold with them, but bicycles, titanium chop sticks and necklaces with small ashtrays attached fly off the shelves.

With smaller items selling better than bigger items, the company may not need all the space it has — some 32,000 square feet — but Madsen said, "We are committed to staying there."

Analysts say REI's decision to move aggressively into two markets last year may be its key to succeeding in an increasingly competitive outdoor retailing environment.

Where REI used to be one of a handful of such retailers, it now faces competition not just from traditional competitors such as L.L. Bean but also from new outdoor equipment makers and fashion retailers such as The Gap who are marketing more outdoor wear.

Other retailers have been hit hard by the changing market. After years of financial difficulties, L.L. Bean is just beginning to rebound, and retailer Eddie Bauer has been forced to close stores this year.

Hodgson said many believe Madsen and Jewell, a former board member who recently came to REI from Washington Mutual Bank, are steering REI in a more business-oriented direction. But while some loyal members miss the company's more touchy-feely roots, Hodgson said the company is likely doing what it can to survive.

"This is a very competitive retailing environment, a very competitive manufacturing environment," he said.