ON THE RIGHT FOOT : L.A. Gear has captured the hearts of teen-age girls. The men’s market will prove a formidable challenge.

On a visit to New York in December, 1986, L.A. Gear Executive Vice President Elliot J. Horowitz couldn’t find the company’s athletic shoes in any store. On a return trip just two months later, he says, “we were all over the city.”

Having taken both coasts by storm, the Los Angeles-based company is marching into the heartland, winning the soles of teen-age girls with fashionable high-tops adorned with splashes of bright color, baubles and rhinestones. Successfully exploiting a peculiarly teen-age taste for casual, breezy fashions, L.A. Gear in just six years has managed to trample much of its competition to become the nation’s third best-selling athletic shoe brand, after Nike and Reebok.

It is a story of spectacular growth that has inspired both awe and disbelief. L.A. Gear sales leaped to $223.7 million for the year ended Nov. 30, 1988, from just $9 million in 1984. Some analysts see L. A. Gear becoming a billion dollar concern within a few years. Noting that the company posted $235.7 million in sales for the first half of the current year, analyst John Horan says, “I would say that they are within striking distance now.”

Meanwhile, L.A. Gear is a star on Wall Street. Its share price has soared with triple-digit earnings gains to become the New York Stock Exchange’s best performer for the first half of this year. All of which must make L.A. Gear founder and Chairman Robert Y. Greenberg whistle while he works Saturdays selling the company’s shoes in various retail stores.

The 48-year-old Greenberg wasn’t available for an interview for this article but has said he works the retail counters to keep in touch with his market. A former wig salesman with several years of experience in the fashion business, he started the company in 1982 as a retail store on Melrose Avenue in Los Angeles. In 1984, he began to import a canvas sneaker from South Korea, transforming L.A. Gear into today’s marketing and distribution concern.

L.A. Gear’s executives attribute the company’s success to a simple concept. They say they aren’t just selling shoes or apparel or watches--the latest additions to the L. A. Gear brand.

“It’s the Los Angeles life style. It’s fun, colorful, fresh and young,” says Horowitz, a 42-year-old accountant who has been chief financial officer since 1986. Dressed in loose-fitting slacks and a casual knit shirt at the company’s Marina del Rey headquarters, Horowitz points out a plaque with the L.A. Gear logo featuring the Los Angeles City Hall surrounded by palm trees.

“People are enamored with the L.A. life style,” agrees Philip O. Sanchen, a Seattle-based analyst with Piper, Jaffray & Hopwood in Minneapolis.

Having come this far on style, L.A. Gear in the past year has been fine-tuning its marketing and product mix in an effort to assure continued growth. The company, which first sold stock to the public in July, 1986, has filed to sell an additional 1 million shares to raise about $54 million to help finance future growth.

Mindful of the company’s reliance on young women as its primary market, many observers have long viewed the company with caution, warning that the bubble could burst with a change in teen fashion trends. About 17% of L.A. Gear sales are children’s fashions, but the bulk of sales are to females aged 13 to 25, Horowitz said.

“L.A. Gear is definitely appealing to a fickle consumer,” says Horan, publisher of Sporting Goods Management News, a Yardley, Pa.-based industry publication. But, he says, “it would be a mistake to think L.A. Gear will grow and turn around and become nothing again.” The most likely scenario is some continued growth, followed by a “leveling off,” he adds.

Horan says L.A. Gear is adept at marketing and now has the added muscle it needs. (The company will spend about $30 million on advertising this year, Horowitz says). “You get to a point where you can spend enough money on advertising and promotion that retailers will have to carry the brand. L.A. Gear has passed the critical mark where they are here to stay,” Horan says.

The brand has “surged from behind” largely on strong advertising with an emphasis on “glamour and show business concepts,” says analyst Jonathan H. Ziegler of San Francisco-based Sutro & Co. Ziegler projects L.A. Gear sales of $558 million this year, with the company earning $6.05 a share--more than double last year’s profit. The media campaign has been supplemented by glitzy, celebrity-packed road shows at industry trade fairs across the country.

As to L.A. Gear’s future in the volatile industry, Sanchen says, “It’s a tough call in the fashion industry.” Reebok “lasted longer than I thought it would,” he adds, explaining that it also had explosive growth based on what appeared to be a fashion whim.

Room to Grow

L.A. Gear acknowledges a debt to Reebok for creating demand for athletic shoes among women. L.A. Gear capitalized on that by stressing fashion, they said. Among L.A. Gear’s advantages, Sanchen says, was the ability to move into the void when Reebok found itself unable to meet demand. Reebok, described as one of the “wild growth successes” of the mid ‘80s, faltered recently as new management struggled to learn the business. While Reebok was pummeling Nike just a few years ago, Nike is now “the boss,” Horan says.

Having created a demand, Sanchen adds, L.A. Gear still has room to grow based on further penetration of the sizable youth market. Other analysts said L.A. Gear can realize growth from its jeans business and further development of its international markets.

L.A. Gear began diversifying in 1986 with men’s shoes and shoes for infants and small children. It added sweat shirts, T-shirts and shorts in 1987, and jeans in 1988. This past spring, the company brought out a new line of moderately priced quartz watches.

While its powerhouse rivals--Reebok and Nike--are challenging L.A. Gear with lower-cost fashionable athletic shoes, L.A. Gear is attempting a major move into their turf with a “performance shoe,” designed to appeal to athletic men.

In one of its more interesting moves, the company signed retired Los Angeles Lakers star Kareem Abdul-Jabbar as spokesman for its new B-424 basketball shoes. It also signed endorsement contracts with Laker Mychal Thompson and Washington Redskins quarterback Doug Williams.

Gaining more of the men’s market--estimated to be about 60% of a $5 billion-a-year athletic shoe market, is essential for L.A. Gear, but few observers expect it to become a serious challenge to Nike’s lead in the men’s market.

“It’s a lot harder for L.A. Gear to win on a technical basis. The macho image for men is a performance shoe,” Sanchen said.

Nike has spent millions for years on research and development, Horan says. “They have such a lead on (athletic shoe design), nobody is going to catch them on technology.”

Spokesman Questioned

Horowitz says it has taken some time for L.A. Gear to learn to make a performance shoe, but he says its basketball shoes now on the market are technically comparable to others. He acknowledges that the company is still learning how to make a running shoe.

Horowitz wouldn’t say what it cost L.A. Gear to sign Abdul-Jabbar, but he acknowledged that the contract includes some compensation based on sales of the B-424 model.

There are some doubts about what kind of performance Abdul-Jabbar will produce for L.A. Gear. “My initial reaction was that they must be going after the geriatric crowd,” Sanchen said. “Why a spokesperson who will soon disappear?” he said, noting that Abdul-Jabbar will be competing with Nike’s very active stars Michael Jordan and Bo Jackson.

Horan says he doesn’t think thatAbdul-Jabbar will persuade the serious athlete to wear L.A. Gear. But he says there is a men’s market for L.A. Gear. “‘The boyfriends of the girls who are buying the Hot Shot (an L.A. Gear women’s high-top) will buy the shoe,” Horan says. He suggests that there is a “Valley Boy” who, like the “Valley Girl,” is more concerned about making a fashion statement than performance.

L.A. Gear does appear to be off to a good start with its new men’s lines. In April, company officials said they expect basketball shoe sales to exceed $100 million this year, based on early orders.

The company is headed by a management team “that lives and breathes the fashion market,” according to associates and observers.

Greenberg, who will own about 20% of shares after completion of the proposed stock sale, previously imported electronic skin-care equipment and denim jeans, operated a wholesale roller-skating business and a chain of skating stores. When the roller-skating fad faded, he began licensing the movie character E.T. for children’s shoe laces.

Tireless Promoters

In addition to Horowitz, the top management team includes Sandy Saemann, a former manufacturer of shoes and safety equipment for the roller-skating industry. Saemann, executive vice president for marketing, creates all of the company’s advertising in-house. The team is credited with launching a successful counteroffensive to an attack by short sellers who bet heavily that L.A. Gear was headed for a tumble. Short sellers borrow stock hoping that the price will fall and that they can replace it at a lower price. The shorts decided to cut their losses earlier this year, after L.A. Gear executives managed a convincing argument that the short sellers were using faulty logic and probably were responsible for spreading false rumors about the company.

L.A. Gear executives are tireless promoters of the company but have sometimes indicated that they may not always be conscious of where to draw the line. After the company’s stock rose over a couple of days in June, company executives told a financial wire service that Business Week magazine had been around for interviews and suggested that a favorable article would be published. Business Week was livid.

L.A. Gear’s success has been a boon to its top officers, because of bonuses equal to 2 1/2% of pretax income over $2 million and 5% of pretax income over $12 million. Cash compensation to Greenberg, Saemann and Horowitz topped $2 million each last fiscal year. Greenberg and Saemann’s employment agreements were to expire in 1990 but were changed in January to expire this November when Horowitz’s agreement expires. Analysts expect new agreements with a greater emphasis on stock bonuses.

SIZING UP THE ATHLETIC SHOEMAKERS

Wholesale sales in millions of dollars, excluding apparel, non-U.S. footwear sales and retail sales.

1988 % Change Market Company Sales ’87 to ’88 share Reebok 1,150 16 27.1 Nike 964 62 22.7 Converse 250 0 5.9 LA Gear 200 178 4.7 Avia 180 20 4.2 Adidas 170 6 4.0 Keds 150 115 3.5 Etonic/ Tretorn 105 28 2.5 New Balance 100 0 2.4 Puma* 100 54 2.4

1987 Market Sales Company Sales share rank Reebok 991 30.1 1 Nike 597 18.2 2 Converse 250 7.6 3 LA Gear 72 2.2 9 Avia 150 4.6 5 Adidas 160 4.9 4 Keds 70 2.1 10 Etonic/ Tretorn 82 2.5 8 New Balance 100 3.0 7 Puma* 65 2.0 13

1986 Market Sales Company Sales share rank Reebok 841 31.3 1 Nike 557 20.7 2 Converse 200 7.4 3 LA Gear 36 1.3 15 Avia 70 2.6 9 Adidas 150 5.6 4 Keds 50 1.9 12 Etonic/ Tretorn 61 2.3 10 New Balance 95 3.5 5 Puma* 78 2.9 8

*Includes wholesale sales of Atlantic Sales, a mass merchandise distributor.

Source: Sporting Goods Management News Inc.