L.A. Gear Stock Dives on News Profit Will Fall
Fast-growing L.A. Gear, which sprinted in recent years into the ranks of the nation’s top sneaker firms, announced its first bad fall Friday. The company estimated that its second-quarter profit would be off as much as 40% from a year ago.
The news devastated the company’s stock, the biggest gainer on the New York Stock Exchange last year. It closed at $30.75, down $8.50 for the day. With 6.6 million shares trading hands, it was the most actively traded issue on the Big Board.
Since closing at $49.80 nine days ago, the stock has fallen 38%, for roughly a $365-million loss in the company’s overall market value.
Analyst Gary M. Jacobson of Kidder, Peabody & Co., who put out a signal for investors to sell their L.A. Gear holdings early in the week, said he was stunned by the company’s earnings projection.
He said he expected earnings to be off, but “in my wildest dreams, I didn’t expect something of this magnitude.”
On the other hand, Jacobson added that the company “is not in trouble.”
“The company’s still going to make money this year, that’s not an issue. . . . Growth is going to moderate,” he said, “but that’s to be expected from a company approaching $1 billion” in annual sales.
L.A. Gear estimated that sales for the quarter ended May 31 were up 33%, to about $225 million. For the first half of the fiscal year, revenue is expected to be up 75%, to $412 million.
Earnings, however, are expected to fall from $16 million in last year’s second quarter to somewhere between $9.5 million and $11.4 million this year.
In a news release, L.A. Gear said its profit margins were squeezed as a bigger share of its sales came from its lower-priced sneakers. The company, trying to put the best face on the results, said profit margins should grow again now that it is bringing out new high-priced sneakers, including its line endorsed by singer Michael Jackson.
The cheaper shoes “have been well accepted and have provided (stores) with an opportunity to make a full profit on relatively low-priced product during an otherwise slow time at retail,” said Robert Y. Greenberg, the company’s chairman and chief executive.
“This strategy has allowed L.A. Gear to significantly expand its market share and retail shelf space during the quarter. We hope to benefit from this expanded share in the third and fourth quarters of 1990, as delivery commences of the newer, higher-margin styles introduced for the back-to-school and holiday selling seasons,” he said.
Officials of the Marina del Rey-based company could not be reached for comment. The news release gave no reason for the steady slide in the company’s stock and the heavy volume of trading since late last week.
The stock’s tumble accelerated Friday morning, and trading was halted at around 10:30 a.m. West Coast time, with the stock already down $2.625 on the day, to $36.625. About 45 minutes later, L.A. Gear announced its earnings projection. When trading resumed later in the morning, the stock opened at $29, and then edged up over the rest of the day.
L.A. Gear’s stock has been dogged for years by short sellers, who sell borrowed shares on the expectation that prices will fall. Until Friday, however, every time short sellers pushed the stock down, L.A. Gear would issue a strong earnings report that would bring the stock back up.
Even at Friday’s closing price, the stock is up more than 10-fold since the company went public in 1986.
The company has skyrocketed ever since Greenberg converted his small shoelace and sportswear business six years ago into a sneaker manufacturer. L.A. Gear, propelled by its breezy Southern California image and a host of celebrity endorsements, has been a particular hit among teen-age girls.
L.A. Gear’s weak earnings projection followed the company’s disclosure that Greenberg, Executive Vice President Sandy Saemann and former Chief Financial Officer Elliot J. Horowitz each earned more than $5 million in cash last year. That apparently would place them among the 15 highest-paid executives at public companies in California.
The company said their compensation was boosted by a formula that links pay to profits. Salaries will be capped at $5 million this year.
