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Just for FEET, Inc.
Life is so fragile. A single bad choice in a single moment can cause a life to turn
irrevocably 180 degrees.
U.S. District Judge C.Lynwood Smith, Jr.
In 1971, 25-year-old Thomas Shine founded a small sporting
goods company, Logo 7, that would eventually become known as
Logo Athletic. Shine’s company manufactured and marketed a
wide range of shirts, hats, jackets, and other apparel items that
boldly displayed the logos of the Miami Dolphins, Minnesota
Twins, Montreal Canadiens, and dozens of other professional
sports teams. In 2001, Shine sold Logo to Reebok and became
that company’s senior vice president of sports and
entertainment marketing. In that position, Shine wined and
dined major sports stars with the intent of persuading them to
sign exclusive endorsement contracts with Reebok.
During his long career, Thomas Shine became one of the most
well-known and respected leaders of the sporting goods
industry. Shine’s prominence and credibility in that industry
took a severe blow in February 2004 when he pleaded guilty to a
criminal indictment filed against him by the U.S. Department of
Justice. The Justice Department charged that Shine had signed a
false audit confirmation sent to him in early 1999 by one of
Logo’s largest customers. The confirmation indicated that Logo
owed that customer approximately $700,000. Although Shine
knew that no such debt existed, he signed the confirmation and
returned it to the customer’s independent audit firm, Deloitte &
Touche, after being pressured to do so by an executive of the
customer. As a result of his guilty plea, Shine faced a possible
sentence of five years in federal prison and a fine of up to
Out of South Africa
At approximately the same time that Thomas Shine was
launching his business career in the retail industry in the United
States, Harold Ruttenberg was doing the same in South Africa.
Ruttenberg, a native of Johannesburg, paid for his college
education by working nights and weekends as a sales clerk in an
upscale men’s clothing store. After graduation, he began
importing Levi’s jeans from the United States and selling them
from his car, his eventual goal being to accumulate sufficient
capital to open a retail store. Ruttenberg quickly accomplished
that goal. In fact, by the time he was 30, he owned a small chain
of men’s apparel stores.
Mounting political and economic troubles in his home country
during the early and mid-1970s convinced Ruttenberg to move
his family to the United States. South Africa’s strict emigration
laws forced Ruttenberg to leave practically all of his net worth
behind. When he arrived in California in 1976 with his spouse
and three small children, Ruttenberg had less than $30,000.
Despite his limited financial resources and unfamiliarity with
U.S. business practices, the strong-willed South African was
committed to once again establishing himself as a successful
entrepreneur in the retailing industry.
Ruttenberg soon realized that the exorbitant rents for
commercial retail properties in the major metropolitan areas of
California were far beyond his reach. So, he moved his family
once more, this time to the more affordable business
environment of Birmingham, Alabama. Ruttenberg leased a
vacant storefront in a Birmingham mall and a few months later
opened Hang Ten Sports World, a retail store that marketed
children’s sportswear products. Thanks largely to his work ethic
and intense desire to succeed, Ruttenberg’s business prospered
over the next decade.
In 1988, Ruttenberg decided to take a gamble on a new business
venture. Ruttenberg had come to believe that there was an
opportunity to make large profits in the retail shoe business. At
the time, the market for high-priced athletic shoes—basketball
shoes, in particular—was growing dramatically and becoming an
ever-larger segment of the retail shoe industry. The principal
retail outlets for the shoes produced by Adidas, Nike, Reebok,
and other major athletic shoe manufacturers were relatively
small stores located in thousands of suburban malls scattered
across the country, meaning that the retail athletic shoe
“subindustry” was highly fragmented. The five largest retailers
in this market niche accounted for less than 10 percent of the
annual sales of athletic shoes.
Ruttenberg realized that the relatively small floor space of retail
shoe stores in suburban malls limited a retailer’s ability to
display the wide and growing array of products being produced
by the major shoe manufacturers. Likewise, the high cost of floor
space in malls with heavy traffic served to limit the profitability
of shoe retailers. To overcome these problems, Ruttenberg
decided that he would build freestanding “Just for FEET”
superstores located near malls. To lure consumers away from
mall-based shoe stores, Ruttenberg developed a three-pronged
business strategy focusing on “selection,” “service,” and
Ruttenberg’s business plan for his superstores involved a storeswithin-a-store concept; that is, he intended to create several
mini-stores within his large retail outlets, each of which would
be devoted exclusively to the products of individual shoe
manufacturers. He believed this store design would appeal to
both consumers and vendors. Consumers who were committed
to one particular brand would not have to search through store
displays that included a wide assortment of branded products.
Likewise, his proposed floor design would provide major
vendors an opportunity to participate in marketing their
products. Ruttenberg hoped that his planned floor design would
spur the major vendors to compete with each other in providing
so-called vendor allowances to his superstores to make their
individual displays more appealing than those of competitors.
Customer service was the second major element of Ruttenberg’s
business plan for his shoe superstores. Ruttenberg planned to
staff his stores so that there would be an unusually large ratio of
sales associates to customers. Sales associates would be required
to complete an extensive training course in “footwear
technology” so that they would be well equipped to answer any
questions posed by customers. When a customer chose to try on
a particular shoe product, he or she would have to ask a sales
associate to retrieve that item from the “back shop.” Sales
associates were trained to interact with customers in such a way
that they would earn their trust and thus create a stronger bond
with them.
Just for Feet’s 1998 Form 10-K described the third feature of
Harold Ruttenberg’s business plan as creating an “Entertainment
Shopping Experience.” Rock-and-roll music and brightly colored
displays greeted customers when they entered the superstores.
When they tired of shopping, customers could play a game of
“horse” on an enclosed basketball half-court located near the
store’s entrance or sit back and enjoy a multiscreen video bank
in the store’s customer lounge. Frequent promotional events
included autograph sessions with major sports celebrities such
as Bart Starr, the former Green Bay Packers quarterback who
was also on the company’s board of directors.
Ruttenberg would eventually include two other key features in
the floor plans of his superstores. Although Just for Feet did not
target price-conscious customers, Ruttenberg added a “Combat
Zone” to each superstore where such customers could rummage
through piles of discontinued shoe lines, “seconds,” and other
discounted items. For those customers who simply wanted a pair
of shoes and did not have a strong preference for a given brand,
Ruttenberg incorporated a “Great Wall” into his superstores that
contained a wide array of shoes sorted not by brand but rather
by function. In this large display, customers could quickly
compare and contrast the key features of dozens of different
types of running shoes, walking shoes, basketball shoes, and
Quite a FEET
Just for Feet’s initial superstore in Birmingham proved to be a
huge financial success. That success convinced Harold
Ruttenberg to open similar retail outlets in several major
metropolitan areas in the southern United States and to develop
a showcase superstore within the glitzy Caesar’s Forum
shopping mall on the Las Vegas Strip. By 1992, Just for Feet
owned and operated five superstores and had sold franchise
rights for several additional stores. The company’s annual sales
were approaching $20 million, but that total accounted for a
small fraction of the retail shoe industry’s estimated $15 billion
of annual sales.
To become a major force in the shoe industry, Ruttenberg knew
that he would have to expand his retail chain nationwide, which
would require large amounts of additional capital. To acquire
that capital, Ruttenberg decided to take his company public. On
March 9, 1994, Just for Feet’s common stock began trading on
the NASDAQ exchange under the ticker symbol FEET. The stock,
which sold initially for $6.22 per share, would quickly rise over
the next two years to more than $37 per share.
Ruttenberg used the funds produced by Just for Feet’s initial
public offering (IPO) to pursue an aggressive expansion
program. The company opened dozens of new superstores
during the mid-1990s and acquired several smaller competitors,
including Athletic Attic in March 1997 and Sneaker Stadium in
July 1998. For fiscal 1996, which ended January 31, 1997, the
company reported a profit of $13.9 million on sales of $250
million. Two years later, the company earned a profit of $26.7
million on sales of nearly $775 million. By the end of 1998, Just
for Feet was the second largest athletic shoe retailer in the
United States with 300 retail outlets.
During the mid-1990s, Just for Feet’s common stock was among
the most closely monitored and hyped securities on Wall Street.
Analysts and investors tracking the stock marveled at the
company’s ability to consistently outperform its major
competitors. By the late 1990s, market saturation and declining
profit margins were becoming major concerns within the
athletic shoe segment of the shoe industry. Despite the lackluster
profits and faltering revenues of other athletic shoe retailers,
Harold Ruttenberg continued to issue press releases touting his
company’s record profits and steadily growing sales. Most
impressive was the company’s 21 straight quarterly increases in
same-store sales through the fourth quarter of fiscal 1998.
In November 1997, Delphi Investments released a lengthy
analytical report focusing on Just for Feet’s future prospects. In
that report, which included a strong “buy” recommendation for
the company’s common stock, Delphi commented on the “Harold
Ruttenberg factor.” The report largely attributed the company’s
financial success and rosy future to “the larger-than-life founder
and inventor of the Just for Feet concept.”
In frequent interviews with business journalists, Harold
Ruttenberg was not modest in discussing the huge challenges
that he had personally overcome to establish himself as one of
the leading corporate executives in the retail apparel industry.
Nor was Ruttenberg reluctant to point out that he had sketched
out the general frame-work of Just for Feet’s successful business
plan over a three-day vacation in the late 1980s. After being
named one of 1996’s Retail Entrepreneurs of the Year,
Ruttenberg noted that Just for Feet had succeeded principally
because of the unique marketing strategies he had developed for
the company. “Customers love our stores because they are so
unique. We are not a copycat retailer. Nobody does what we do,
the way we do it. The proof is in our performance.”
In this
same interview, Ruttenberg reported that he had never been
tempted to check out a competitor’s stores. “I have nothing to
learn from them. I’m certainly not going to copy anything they
are doing.”
Finally, Ruttenberg did not dispute, or apologize
for, his reputation as a domineering, if not imposing, superior. “I
can be a very demanding, difficult boss. But I know how to build
teams. And I have made a lot of people very rich.”
Ruttenberg realized that one of his primary responsibilities was
training a new management team to assume the leadership of
the company following his retirement. “As the founder, my job is
to put the right people in place for the future. I’m preparing this
company for 25 years down the road when I won’t be here.”
One of the individuals who Ruttenberg handpicked to lead the
company into its future was his son, Don-Allen Ruttenberg, who
shared his father’s single-minded determination and tenacious
business temperament. In 1997, at the age of 29, Don-Allen
Ruttenberg was named Just for Feet’s vice president of new store
development. Two years later, the younger Ruttenberg was
promoted to the position of executive vice president.
Similar to most successful companies, Just for Feet’s path to
success was not without occasional pitfalls. In 1995, Wall
Street’s zeal for Just for Feet’s common stock was tempered
somewhat by an accounting controversy involving “store
opening” costs. Throughout its existence, Just for Feet had
accumulated such costs for each new store in an asset account
and then amortized the costs over the 12-month period
following the store’s grand opening. A more common practice
within the retail industry was to expense such costs in the month
that a new store opened. Criticism of Just for Feet’s accounting
for store opening costs goaded company management to adopt
the industry convention, which resulted in the company
recording a $2.1 million cumulative effect of a change in
accounting principle during fiscal 1996.
In the summer of 1996, Wall Street took notice when Harold
Ruttenberg; his wife, Pamela; and their son, Don-Allen, sold large
blocks of their Just for Feet common stock in a secondary
offering to the general public. Collectively, the three members of
the Ruttenberg family received nearly $49.5 million from the
sale of those securities. Major investors and financial analysts
questioned why the Ruttenbergs would dispose of much of their
Just for Feet stock while, at the same time, the senior Ruttenberg
was issuing glowing projections regarding the company’s future
Clay Feet
No one could deny the impressive revenue and profit trends that
Just for Feet established during the mid- and late 1990s. Exhibit
1 and Exhibit 2, which present the company’s primary financial
statements for the three-year period fiscal 1996 through fiscal
1998, document those trends. However, hidden within the
company’s financial data for that three-year period was a red
flag. Notice in the statements of cash flows shown in Exhibit
2 that despite the rising profits Just for Feet reported in the late
1990s, the company’s operating cash flows during that period
were negative. By early 1999, these negative operating cash
flows posed a huge liquidity problem for the company. To
address this problem, Just for Feet sold $200 million of highyield “junk” bonds in April 1999.
Exhibit 1Just for FEET, Inc., 1996–1998 Balance Sheets
Exhibit 2Just for FEET, Inc., 1996–1998 Income
Statements and Statements of Cash Flows
A few weeks after selling the junk bonds, Just for Feet issued an
earnings warning. This press release alerted investors that the
company would likely post its first-ever quarterly loss during the
second quarter of fiscal 1999. One month later, Just for Feet
shocked its investors and creditors when it announced that it
might default on its first interest payment on the $200 million of
junk bonds. Investors received more disturbing news in July
1999 when Harold Ruttenberg unexpectedly resigned as Just for
Feet’s CEO. The company replaced Ruttenberg with a corporate
turnaround specialist, Helen Rockey. Upon resigning, Ruttenberg
insisted that Just for Feet’s financial problems were only
temporary and that the company would likely post a profit
during the third quarter of fiscal 1999.
Harold Ruttenberg’s statement did not reassure investors. The
company’s stock price went into a freefall during the spring and
summer of 1999, slipping to near $4 per share by the end of July.
In September, the company announced that it had lost $25.9
million during the second quarter of fiscal 1999, a much larger
loss than had been expected by Wall Street. Less than two
months later, on November 2, 1999, the company shocked its
investors and creditors once more when it filed for Chapter
11bankruptcy protection in the federal courts.
Just for Feet’s startling collapse over a period of a few months
sparked a flurry of lawsuits against the company and its
executives. Allegations of financial mismanagement and
accounting irregularities triggered investigations of the
company’s financial affairs by state and federal law enforcement
authorities, including the Alabama Securities Commission, the
FBI, the Securities and Exchange Commission (SEC), and the U.S.
Department of Justice. In May 2003, the Justice Department
announced that a former Just for Feet executive, Adam Gilburne,
had pleaded guilty to conspiracy to commit wire and securities
fraud. Gilburne, who had served in various executive positions
with Just for Feet, revealed that he and other members of the
company’s top management had conspired to inflate the
company’s reported earnings from 1996 through 1999.
The information [testimony provided by Gilburne] alleges that beginning in about
1996, Just for Feet’s CEO [Harold Ruttenberg] would conduct meetings at the end of
every quarter in which he would lay out analysts’ expectations of the company’s
earnings, and then draw up a list of “goods”—items which produced or added
income— and “bads”—those which reduced income. The information alleges that
the CEO directed Just for Feet’s employees to increase the “goods” and decrease the
“bads” in order to meet his own earnings expectations and those of Wall Street
Approximately two years following Gilburne’s guilty plea, the
SEC issued a series of enforcement releases that documented the
three key facets of the fraudulent scheme perpetrated by Just for
Feet’s management team. “Just for Feet falsified its financial
statements by

improperly recognizing unearned and fictitious receivables from
its vendors,

failing to properly account for excess inventory, and

improperly recording as income the value of display booths
provided by its vendors.”
The stores-within-a-store floor plan developed by Harold
Ruttenberg provided an opportunity for Just for Feet’s vendors
to become directly involved in the marketing of their products
within the company’s superstores. Each year, Just for Feet
received millions of dollars of “vendor allowances” or
“advertising co-op” from its major suppliers. These allowances
were intended to subsidize Just for Feet’s advertising
expenditures for its superstores.
Despite the large size of the vendor allowances, in most cases
there was not a written agreement that documented the
conditions under which Just for Feet was entitled to an
allowance or the size of a given allowance. After Just for Feet had
run a series of advertisements or other promotional
announcements for a vendor’s product, copies of the advertising
materials would be submitted to the vendor. An account
manager for the vendor would then approve an allowance for
Just for Feet based upon the amount of the advertised products
that the company had purchased.
Generally accepted accounting principles (GAAP) dictate that
vendor allowances not be offset against advertising expense
until the given advertisements have been run or other
promotional efforts have been completed. However, Just for Feet
began routinely recording anticipated vendor allowances as
receivab …
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