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Profiles in Doing Both: Skechers: A Lesson in Optimization and Reinvention

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You don't need to be the editor of Vogue to know what the hottest trend in women's footwear is. All you need to do is glance down at the sidewalk and look at what women are wearing.

Amid the sea of Jimmy Choo pumps and Taryn Rose sandals, you're bound to see plenty of Skechers' Shape-Ups. These are the round-bottomed, "toning" shoes that young women and working moms have jumped all over.

Just two years ago, the category was a tiny sliver of the shoe industry. Today, it is the fastest-growing market segment. Sales of toning footwear are expected to top $1.5 billion this year alone.

For Skechers, the birth of the toning shoe market represented another opportunity for a reinvention. At the time, the company was dependent on sales of street-wise, fashion-forward footwear. To combat growing competition from start-up imitators and established rivals such as Vans, Skechers worked to optimize its business through ongoing geographic expansions, supply chain enhancements and clever marketing programs.

Behind the scenes, however, Skechers was laying the groundwork for a dramatic transformation. In May 2009, company executives unveiled the company's new line of Shape-Ups--Skechers' first, major foray into fitness footwear. Soon thereafter, the company enlisted Super Bowl MVP and NFL Hall of Famer Joe Montana to help promote its new toning shoes. When Super Joe said he believed in the products, sales zoomed like one of his trademark, touchdown passes. By July of this year, toning products helped lift Skechers' quarterly sales above $500 million for the first time in company history.

Around the world, men and women alike were responded enthusiastically to the promise that they could "get in shape without setting foot in a gym." The intriguing possibilities drove the company's stock up more than 90 percent.

Just when things were running smoothly, however, Skechers hit a major hurdle. In July, the American Council on Exercise released a report that questioned the benefits of toning shoes. "Don't buy these shoes because of the claims that you're going to tone your butt more or burn more calories," concluded researcher Dr. John Porcari.

Shortly after that blunt assessment became public, shares of Skechers and other makers of toning shoes began to lose traction. On Sept. 9 alone, shares of Skechers dropped 12 percent after an investment house downgraded its rating on the company's stock. To make matters worse, a customer filed a lawsuit against the company, claiming false advertising, among other things.

With retailers slashing prices and shoe giant Nike dismissing the value of toning products, one would think Skechers would be in a freefall. But it's not. More than one investment house believes Skechers' stock has legs, and some medical professionals assert that toning shoes offer benefits. For these and other reasons, many company watchers believe Skechers will continue its winning ways. "Skechers has a history of adeptly capitalizing off different shoe fads with its own offerings," says Motley Fool writer Alyce Lomax.

How? By continuously fine-tuning and transforming its business.

On the optimization front, Skechers is making improvements to its e-commerce platform and reducing inventories ahead of new product introductions slated for the holidays. It's also moving ahead with plans to build a state-of-the-art, 1.8 million sq.-ft. distribution facility in Rancho Belago, Calif.

As for reinvention, Skechers recently entered the travel accessories and branded luggage business. It is also exploring backpacks, handbags and leather products for the first time. And with a major push into medical footwear and electrical-hazard shoes on the horizon, Skechers is transforming from a mere fashion shoe company into a lifestyle brand and vertical market specialist. Today, it has more opportunities ahead of it than anytime in its 18-year history.

While the short-term holds some uncertainty, the company's long-term prospects look solid. Doing both tuning and transforming has toned up the three-time "Company of the Year" award winner and positioned it for even greater success.

Inder Sidhu is the Senior Vice President of Strategy & Planning for Worldwide Operations at Cisco, and the author of Doing Both: How Cisco Captures Today's Profits and Drives Tomorrow's Growth. Follow Inder on Twitter at @indersidhu.