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Performance To Grow with Capital Infusion

Published October 16, 2007

BY SEAN HONG

AUSTIN, TX—Hill Abell is on the frontline competing against Performance Bicycles’ retail outlets. So when Performance announced a multi-million dollar infusion of capital to launch another 90 stores over the next four years, he paid attention.

Early last month, Peformance announced that it had been acquired by private equity firm North Castle Partners
based in Connecticut.

Abell is a Top 100 Retailer with two stores in Austin, a community he describes as a “very sophisticated cycling
market.” Performance has a store near his north Austin location and is about to open another one mile from his central Austin store.

As a Trek and Specialized dealer, Abell isn’t concerned about Performance’s impact on unit sales, since
Performance stocks only “C” level product.

Instead, he worries that Performance, which has a reputation within the industry for mediocre sales and service, will turn off customers new to cycling.

“My concern about Performance is that we feel they don’t do a good job serving customers. We think that reflects poorly on all IBDs. More than anything, that’s our concern,” he said.

Abell described his stores as having a very differentiated product line so there’s little overlap between his operation
and Performance.

However, Jay Graves, another Top 100 Retailer, has three Performance operations in the suburbs of Portland, Oregon, where his six Bike Gallery stores are located. And Performance has taken a bite out of his business.

“We’ve been competing with Performance in our Beaverton location for more than 10 years. At first we took a real hit, but now we have a differing customer base,” he said. But Performance added two more locations two years ago.

Graves said Performance typically attracts two types of customers—those with little cycling experience who only
shop price, and knowledgeable cyclists who buy discounted parts and accessories and who work on their own bikes.

“We think things will settle down in our market,” he said, noting that his company actively pushes its community
involvement. However, what his store managers report is that customers buy a name-brand bicycle, like a Trek, from Bike Gallery and then go to Performance for low-priced accessories. “That drives our store managers nuts,” Graves said.

While Performance continues to build its retail base, the company faces a significant problem finding and hiring
managers and well-trained mechanics. Currently, the company has openings on its Web site for store managers or
managers-in-training in 28 different locations. It also has a lengthy job list for other positions.

Also complicating Performance’s overall operation is the lack of major brand names like Trek or Specialized or
smaller, high-end niche brands. While it carries a mix of Iron Horse, Mongoose, Schwinn and GT bikes, none have the brand-pull of a Specialized.

Mike Sinyard, president and founder of Specialized, said for dealers facing competition from Performance it’s essential
they line up with a major brand. “It’s more competition for independent dealers and it raises questions for dealers
about who they will work with to supply their bikes and equipment,” he said.

Jay Townley, a marketing and research consultant, said Performance’s recent purchase by North Castle Partners
represents an unprecedented move by a private equity firm to add a bicycle company to its portfolio.

“If Performance is positioning to increase its number of retail locations, which recent history indicates it is, this
deal brings in the cash to make retail expansion possible at a much faster rate than Performance has been able to finance in the past,” he added.

Performance currently operates 74 outlets in 14 states and has plans to open 90 more over the next four years. Besides the Performance brand, the company also owns Nashbar and 15
other proprietary brands.

Gary Snook, who co-founded Performance out of his basement in 1982, retains a “significant” equity position in the company. Several senior members of Performance’s management team will also have a stake in the company.

North Castle Partners has a focus on healthy living and, in particular, aging baby boomers.

Even before the deal with North Castle, Performance had ramped up efforts to open more stores. In mid-July, it opened a 7,900-square-foot store in Beavercreek, Ohio, the company’s fourth in the state. And in late July, Performance
opened a second store in the Houston area—its seventh in Texas.

“On the surface it would appear that they see opportunity to expand their business model, which is unique in our industry,” said Fred Clements, executive director of the National Bicycle Dealers Association.

Clements said that unlike other multiple-store chains that focus on defined regional markets, Performance is a true
national giant. Performance has been expanding its retail store program for years, but hasn’t grown as quickly as
the company originally promised.

Alan Goldsmith, who sold Supergo to Performance in 2002, agreed. “I suppose Performance should benefit by having a motivated, new long-term investor that’s aligned with its objectives. Also, no more executive time will be lost shopping big Wall Street deals,” Goldsmith said. Performance had once sought to file an IPO on Wall Street.

“The simultaneously scary but reassuring implication for IBDs is the validation of the retail bike business that results from a new mega-buck investment in bricks-and-mortar by presumably ‘smart money.’ With more stores, how can Performance not affect more IBDs than before?” Goldsmith added.

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