Out of Step : L.A. Gear, in Athletic Shoe Race, Seeks to Regain Foothold
L.A. Gear Inc. has been getting a real workout these days. The company that gave America the lighted sneaker is being shoved aside by stronger competitors such as Nike, the industry’s powerhouse, and up-and-coming trendy brands such as Fila.
Key athletic shoe retailers are dumping the brand, saying not enough people want it. Though it continues to sell L.A. Gear kids’ shoes, FootAction stopped stocking the brand’s flagship women’s shoes six months ago and dropped L.A. Gear men’s shoes several months before that.
Even kids are flexing their muscles, choosing rival brands endorsed by basketball players Shaquille O’Neal or Michael Jordan over L.A. Gear’s signature lighted sneaker. Two new gimmicky shoes introduced during the back-to-school season haven’t yet caught on with the grade school set.
The Santa Monica company got a small vote of confidence this week when Bank of America extended a loan agreement, though the bank lowered the amount to $50 million from $75 million. Even so, L.A. Gear’s weak performance raises questions about whether it can go the distance on its own.
L.A. Gear President William Benford said there is not a “for sale” sign on the money-losing company, whose investors include members of the Disney family. But people close to the company said there have been discussions with possible buyers, though active negotiations are not underway.
Benford declined to comment when asked if the company is in talks with any potential suitor.
Analysts said it is unlikely that a buyer would step forward if L.A. Gear continues to lose money. It has lost about $200 million since members of the Roy E. Disney family acquired a controlling interest in 1991.
“A sale is possible, but they need to show an operating profit first,” said William Eddleman Jr., an analyst who follows distressed companies for Coastal Securities in Houston.
Only six years ago, L.A. Gear was a runaway success. As a maker of trendy women’s shoes in 1990, it captured 12% of the athletic shoe market and its stock traded at $50. Its share of the athletic shoe market shrank to 3% in 1995 and its stock currently is hovering at about $3 on Nasdaq.
The company lost its way in the early 1990s when it flirted with men’s performance shoes, pitting itself against Nike, Reebok and others. As part of a turnaround strategy adopted by Benford two years ago, the company abandoned men’s performance shoes in favor of fashion-oriented sneakers for women and children.
So far, it is hard to see where the new strategy is making a difference. In July, the company reported that sales in its fiscal second quarter plummeted 51% as demand for its lighted children’s sneakers cooled and Wal-Mart, an important retail customer, reduced orders. Losses in the quarter widened for the same period a year ago, to $9.6 million from $7.8 million in 1995.
The company has made two moves to gain financial breathing room. In late 1995, it fired 30% of its work force to save $25 million a year.
Then in April, L.A. Gear avoided a $50-million payment to the Disney investors through a preferred stock swap with them. The reprieve is temporary. Dividends totaling $7.8 million are due the Disney group in 1997.
L.A. Gear needs to show improvement during the next six months to show its turnaround effort is for real, analyst Eddleman said.
Much of L.A. Gear’s energy is focused on its women’s shoe business, where the company is using fashion and discounts to entice shoppers. Moving to leverage its name, L.A. Gear has introduced casual styles with a Hollywood flavor, such as a plaid canvas sneaker called the “Hepburn.” Meanwhile, prices on older styles have been slashed by $10 to $18, retailers say, so that most L.A. Gear shoes go for less than $50.
The price cuts were important because consumers don’t view L.A. Gear as a premium brand. “Anything over $50 is difficult for L.A. Gear,” said Susan Hopper, an executive who oversees shoe buying for Sears, Roebuck & Co.
In its children’s business, L.A. Gear is pushing ahead with new gimmicks to succeed its former blockbuster, the lighted sneaker. But production delays have caused late shipments of Neonz, a new lighted shoe that uses a liquid crystal display. Meanwhile, sales of Grafx, a new shoe that changes color, have disappointed shoe retailers.
Hopper said that whereas Neonz shows promise, Grafx is a tough sell.
“With the lighted shoe, you see the light go on, and you get it,” she said. “The concept of Grafx is hard to get across on the sales floor.”
L.A. Gear’s struggles come at a time when the athletic shoe business is stagnant. Sales of men’s and children’s shoes declined in 1995, as buyers snapped up alternative footwear, such as sandals and boots. Though sales of women’s shoes rose nearly 10%, the gain has been attributed to greater participation by women in sports, a force working against a fashion-oriented company such as L.A. Gear.
Indeed, Nike and Reebok said their women’s shoe sales are up. Both firms are pursuing women as never before, spending millions of dollars on TV commercials and athletic endorsements; Reebok is sponsoring the newly formed women’s professional basketball league. Another brand, Fila, has seemingly come from nowhere to become trendy with teens.
Meanwhile, L.A. Gear’s women’s shoe business, which has no female athletic endorsers, is expected to show a 5% decline in 1996, according to Eddleman, the securities analyst. He anticipates that sales of L.A. Gear children’s shoes will drop by 5% too. (He is forecasting a 20% decline in sales of men’s shoes.)
Benford declined to make sales projections. Looking to next year, he said, the company plans to introduce a wide-soled women’s sneaker inspired by snowboarding. He thinks the women’s line will get a spark from the Fatmox, despite an expected $60 price tag.
Commenting on L.A. Gear’s progress so far, he said, “It’s a slow build.”
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In the Running
L.A. Gear Inc. has fallen from the nation’s fourth-largest athletic shoe company in 1993 to the sixth largest today. A look at the leaders in the $6.9-billion U.S. athletic shoe market:
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Rank Company 1995 sales, in millions Market share 1 Nike $2,530 36.8% 2 Reebok 1,410 20.5 3 Fila 399 5.8 4 Adidas 355 5.2 5 Keds 245 3.6 6 L.A. Gear 205 3.0 7 Converse 200 2.9 8 Airwalk 185 2.7 9 New Balance 151 2.2 10 Asics 123 1.8 Others: 15.5
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Source: Sporting Goods Intelligence
