HBS Business Plan Contest Pitch

April 3, 2012

Feel free to direct any questions / inquiries to jmendal@mba2012.hbs.edu

Introduction

1. Sterling Kane is the Warby Parker for men’s leather goods. Think Gucci quality at Calvin Klein prices

2. Team has extensive experience and unique ‘unfair’ advantages in leather

3. What is our brand persona? Let’s just say Sterling Kane runs in the same circles as our friend over here

Before you dive in, three things to know…

2

Team

Jayme Abe

Brothers with deep family roots in leather. 3rd generation in family business, Pan American Leathers

• HBS – Class of 2012

• Li & Fung – World’s largest supply chain manager for apparel / fashion

• AirLinke – Founded regional air charter company

• Monitor Group – Growth Strategy

• AJSkins.com – Co-founded online wholesaler, retailer of private label men’s leather goods in college

• Pan American Leathers – VP of Finished Product Sourcing for customers including Polo, John Varvatos, J. Crew, and many more household brands

• PAL has also supplied Coach, LVMH, Hermes, etc.

•AJSkins.com – Co-founded online wholesaler, retailer of private label men’s leather goods in college

• Blackrock – Analyst

3

Problem – Retail Supply Chain 101

The Pain is Simple:

• People pay up to 10X what it cost to produce high end leather goods

• Given relatively high cost of goods in leather, dollar markups can be ridiculous • Examples of products we’ve sourced for brands through Pan Am Leathers:

• Nice leather bag at Nieman Marcus… Cost $500. Price $3,500

• Private label alligator belt at Dept. Store X… Cost $50. Price $400

CraftsmanBrand /

Wholesaler

Retailer

Customer

Traditional Retail:

2x 2.5x

Product is complete here. Cost to

produce is $50.

2x

Product sold to customer here. Sale

price is $500.

4

How big is this problem?High end men’s leather goods market is $2.7B (in U.S) and growing rapidly

• ‘Mens’ category is growth engine for business in fashion at the moment • Luxury menswear market is growing at ~14% / year, double the pace of luxury women's wear, according to Bain

Market Size Market Growth

Source: http://www.reuters.com/article/2012/03/29/us-usa-retail-luxury-idUSBRE82S15R20120329; http://www.wikinvest.com/stock/Coach_%28COH%29; http://www.marketresearch.com/MarketLine-v3883/Luggage-Leather-Goods-United-States-6854915/

• $2.7B market for high end U.S. men’s leather goods

• Calculated using data on Coach’s sales and market share• Represents 14% of $19.6B U.S. luggage and leather goods market

Select Examples:

•“Coach is banking on more business from men…expects sales of men's products this year to reach $400 million, and climb to $1 billion within a few years.”

• “Hugo Boss targets sales gains of 50% to €3 billion by 2015, helped by cultural shift that has led more men to be interested in fashion and invest in appearance.”

5

Solution – Sterling Kane

• E-commerce brand of luxury quality men’s leather goods, priced 40-60% lower than other brands of comparable quality (e.g., Tod’s, Gucci, Varvatos).

• Achieve price advantage by eliminating cost + risk from value chain after the product has been created. Quality of product never compromised.

… How do we deliver on this?6

Solution – Sterling KaneQuality –

• Suppliers: Same leather, components used by leading luxury brands

• Manufacturers: Same manufacturers used by leading luxury brands

• Design: Designers who have designed for leading luxury brands

Value –

Cut Middlemen: Receive goods from the factory and ship direct to customer. Eliminates cost, markups

Minimize Overhead Costs: Predominantly online retail - no big stores, salespeople, etc.

Minimize Inventory Cost, Risk: Products made to order in batches

Sell only through channels which provide us with price control: Eliminates channel pricing conflict with traditional retail partners

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Solution – Sterling KaneSnapshot from website:

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Our Edge

• 60 years in leather goods supply chain > network of suppliers, manufacturers

1. Quality Raw Materials: Quality can’t be faked in leather. Need good suppliers

2. Production: Need to navigate fragmented, global, old school supplier network

3. Cashflow Management: Need to control materials

cost + good inventory management

4. Branding / Traffic: Press/buzz and brand is key. Can’t build business on PPC, SEO, etc...

Keys to success

Competitors / New Entrants

Our Edge

• Fashion press contacts• Story resonates – HBS, two brothers in leather family

• ‘Friendly’ supplier (Pan American) charges us cost for materials!!!• Made-to-order biz model -> negative working capital

9

Unit Economics

• 45-50% unit gross margin• Minimal overhead• Negative working capital

Unit Economics (‘average’ product)

Price $200

Cost of Goods $100

Free Shipping $10

Gross Margin $90

Current Highlights

• Existing numbers based on domestic production

• Currently preparing production capabilities in Colombia

• Result will be 40-50% lower COGS -> GM increases to 70%

Future Improvements

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Go to Market Strategy

SEO

Channel Examples

• GQ, Urban Daddy, Esquire, Thrillist

Referral Marketing

Editorial / Press

Retail Editorial

Retail PartnershipsTrunk Shows

• Gilt, Fab, UD Perks

• Bespoke Custom Suit Co’s, Boutique Store-in-Store• HBS, university partnerships, pop-up stores

• On selective, non-competitive keywords

• Incentives for customers to refer via FB, Twitter, e-mail

Selective PPC • On low cost, non-competitive products

3 priorities: 1) Create brand awareness 2) Establish credibility for product quality 3) Drive sales. Have begun firing on all cylinders below with great results so far

Corporate Gifts • Sell into leadership/HR of select companies

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Competitive Landscape

Hermes

Quality / Brand Perception

Affordability

Sterling Kane

Low

High

Low High

Mass Luxury Fashion Houses – Gucci, Tod’s, Louis Vuitton

‘Accessible Luxury ‘Brands – Coach, Cole Hann; AND Popular Niche Brands: Jack Spade, Billy Reid, Trafalgar, John VarvatosMass Market Brands

– Johnston Murphy, Calvin Klein

We expect to steal share primarily from three categories of customers

c) Mass market brand customer: Guy who pays $300 for a decent quality

briefcase from Johnston and

Murphy now pays $275 for a much

nicer one

a,b) Accessible Luxury and Niche High End Brand customer: Guy who pays $1,000 for a nice leather weekender bag now gets one of comparable

or higher quality for $495

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Financial Projections

Rest of 2012 2013 2014 2015 2016 2017

Total SKUs 20 50 100 150 250 350

Total Units Sold 500 2,000 5,000 10,000 25,000 50,000

Average Price per Unit 200 200 200 200 200 200

Average GM/Unit 90 135 130 130 130 130

Total Revenue 100,000 400,000 1,000,000 2,000,000 5,000,000 10,000,000

Total Contribution 45,000 270,000 650,000 1,300,000 3,250,000 6,500,000

Personnel 38,000 250,000 620,000 680,000 960,000 1,030,000

Customer Acquisition 12,500 46,000 112,000 224,000 535,000 1,070,000

Product Development 5,000 30,000 50,000 50,000 100,000 100,000

PR 3,000 32,000 35,000 40,000 40,000 40,000

Media / Copy 3,500 5,000 7,000 9,000 9,000 9,000

Facilities - - 60,000 60,000 60,000 60,000

EBIT (17,000) (93,000) (234,000) 237,000 1,546,000 4,191,000

Expect cash need of ~$350K to reach $10M in revenue and $4.2M EBIT by 2017. This represents just 0.01% of a huge, growing, men’s luxury leather goods market

*See appendix for more detailed breakout of costs

*Note gross margin bump as we shift production to Colombia in 2013

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Current Status

• Product Line: Initial line developed (12 SKUs). Doubling SKU count over next 2 months

• Website: Beta is live. Re-design and significant improvements planned in next 2 months

• Press: Coverage from Urban Daddy. Sale planned with Gilt. Interest from GQ, others…

• Financial: $5,000 in sales in first month (with mediocre site, very limited selection)

Current Status

1. Quickly establish leadership position among e-commerce leather goods brands

2. Expand into other related product categories to become first stop for men’s leathers goods and accessories

Vision for Future

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The Ask

1. Vote in the Business Plan Contest • We’re serious about this. Demonstrated progress. Well positioned

to become leading e-commerce men’s accessories brand.

2. Contacts: We would appreciate introductions to… • Angel investors: Plan to raise $200K in next few months. Cash

will be used for new product development, full time tech lead, merchant/designer, PR agency. Candidates currently being vetted.

1. People who have scaled e-commerce companies!

3. Feedback?

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AppendixSG&A and Product Development Cost Details

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Rest of 2012 2013 2014 2015 2016 2017Headcount (full time) 2 5 10 12 15 15 Founder(s) 30,000 60,000 120,000 120,000 160,000 160,000 Technical Lead 8,000 70,000 140,000 140,000 210,000 280,000 Add full time sales / marketing / social media - 60,000 60,000 120,000 120,000 120,000 Add full time designer / merchant - 60,000 120,000 120,000 180,000 180,000 Utility players - - 70,000 70,000 70,000 70,000 Customer Service - - 60,000 60,000 120,000 120,000 Logistics / Packaging / Shipping - - 50,000 50,000 100,000 100,000

Office / Warehouse Rent - - 50,000 50,000 50,000 50,000 Utilities + Supplies 10,000 10,000 10,000 10,000

*Shared space with Pan Am Leathers until 2014PR ManagementHire PR agency 0 20,000 20,000 20,000 20,000 20,000Press Kit / Gifts / Samples 2,000 10,000 10,000 10,000 10,000 10,000Events 1,000 2,000 5,000 10,000 10,000 10,000

Media / CopyVideo 2,000 3,000 4,000 5,000 5,000 5,000Photography 1,500 2,000 3,000 4,000 4,000 4,000

Customer AcquisitionSponsored search + Facebook Ads 2,000 5,000 10,000 20,000 30,000 60,000Commission to Sales Partners 10,000 40,000 100,000 200,000 500,000 1,000,000Print marketing materials 500 1000 2000 4000 5000 10000

New Product Development Product Development Costs 5000 30,000 50,000 50,000 100,000 100,000