Market Watch : If the Shoe Fits, Buy It
Nike and L.A. Gear have been hot stocks in recent years. Reebok has stumbled. Now here comes K-Swiss.
The Pacoima-based athletic shoe maker will go public in June, selling 1.45 million shares at an expected $12 to $15 apiece.
K-Swiss isn’t nearly as well known as its bigger competitors, but its classic tennis shoe has been a standard since 1966. It was one of the first leather tennis shoes introduced in the late ‘60s.
Founded by two Swiss brothers, K-Swiss built its reputation on the tennis shoe, stressing “construction, durability and traditional styling.” Sales remained modest until 1986, when K-Swiss was sold to a group led by Steven Nichols, who was merchandise chief at shoemaker Stride Rite Corp.
Nichols, 47, has put K-Swiss on the fast track. The company launched seven new athletic shoe styles last year and plans 10 new styles this year. From the original tennis shoe, K-Swiss has branched into basketball, walking and cross-training shoes, most priced $40 to $85 at retail.
Nichols’ strategy seems to be working, even with the huge number of competing shoes out there: K-Swiss’ revenue jumped 72% last year to $69.4 million. Net income soared 75% to 91 cents a share. In the first quarter of this year, revenue rose 50% to $22.7 million, and net income rose 28% to 26 cents a share.
The company will use the money from its stock offering to pay down debt, freeing more capital for growth. Even at $15 a share, K-Swiss appears relatively cheap, if earnings reach an expected $1.20 a share or better this year. So this could be a very hot deal.
But Elizabeth Armstrong, an analyst with Prescott, Ball & Turben in New York, warns that although there is room to grow in the athletic shoe business, “a company has to be dominant somehow”--the way Nike is in men’s shoes and L.A. Gear in women’s. K-Swiss’ biggest product remains its classic tennis line (now 41% of revenue), but the shift into new styles means “they’re going to spend a lot of money, at the risk of a low return,” if the shoes don’t catch on or suddenly fade, Armstrong said.
So far, K-Swiss doesn’t seem to have a problem with acceptance. One of the company’s key objectives is trying to avoid super-trendiness, sticking with a basically classic styling for all of its shoes (all made at relatively low cost overseas). The goal: long product life cycles and lower promotional spending. K-Swiss has an upscale, high-quality image and wants to keep it.
Goldman Sachs and Merrill Lynch are handling the deal. If you can get these shares, they may zoom post-sale. But keep in mind that trendiness in shoes, as in everything, is in the eye of the fickle consumer. As Reebok found, it’s hard to stay ahead of the curve.
THE K-SWISS STORY
Figures in millions of dollars, except earnings per share. Pairs sold in millions.
Year 1987 1988 1989 Revenue $33.66 $40.45 $69.42 Operating profit 0.59 5.75 11.80 Net income -1.16 2.73 4.76 Earnings per share -0.22 0.52 0.91 Total debt 12.81 18.44 34.60 Stockholders’ equity 0.99 3.77 8.52 Pairs sold 1.50 1.58 2.70
Source: K-Swiss prospectus
Tangled Webb: Western retirement community developer Del Webb Corp. seems like a takeover story waiting to happen. And however it shakes out, it’s tough to imagine that buyers of the stock at the current price won’t make money long term.
Last Wednesday, Phoenix-based Webb held its annual meeting. Shareholders voted on a proposal offered by director James Cotter, a big-name investor who runs L.A.-based Craig Corp., to rescind a poison-pill provision. Cotter wants the company to be receptive to takeover offers, should any come its way.
Webb management argued that the poison pill just made sure that any takeover offer would be fair. Management was pretty confident that shareholders would back the pill. But based on an early count late last week, it appeared Cotter may have won.
Donald Mickus, Webb’s treasurer, said Cotter’s victory isn’t certain. Final results of the voting are to be released this week.
What happens if the poison pill is rescinded? Well, Cotter owns 9.7% of Webb stock. New Zealand-based Industrial Equity holds 9.7%. Trust Co. of the West holds 6%. And there are rumors around Los Angeles that several other investors hold unrevealed 4.9% stakes.
All of those investors potentially have an interest in selling Webb to the highest bidder. The stock has been weighed down by the general panic over real estate values. David Jackson, analyst for the Western Group, argues that Webb’s land assets are worth $23.50 a share. The stock, meanwhile, sells for $9.875.
Even assuming the poison pill remains, or no bidder surfaces, Webb is making good money off its retirement home sales in Arizona and Nevada. Jackson sees earnings of $1.60 a share this year. Demographics favor the company long term, and its plans for new communities include a 1,500-acre site near Palm Springs. For the patient investor, this is either a very undervalued stock, or a lot of normally smart money is going to look pretty dumb.
CHEAP STOCK?
Del Webb Corp. monthly close in dollars per share: Friday: $9.875
