L.A. Gear Cites Ad Costs as Net Slides 35% in Quarter
L.A. Gear, which stubbed its toe after racing to become the nation’s No. 3 sneaker firm, said Thursday that third-quarter earnings were off 35% from last year’s pace.
It was the second straight decline in quarterly earnings for L.A. Gear, which until this spring had enjoyed galloping profit growth since becoming a public company in 1986. The company also projected that profits for the fourth quarter and the entire year will be off from 1989.
Earnings for the quarter ended Aug. 31 totaled $14.3 million, despite sales that climbed 40% to $300.3 million. The company, in a news release from its headquarters in Marina del Rey, said higher advertising expenses and the overall slump in retailing lowered profit in the third quarter and will do the same in the fourth quarter.
L.A. Gear also cited its growing reliance on apparel sales and business in foreign markets, where profit margins are lower.
“The company is clearly going through some growing pains, but it’s not going to go away,” said Gary Jacobson, an analyst with Kidder, Peabody & Co.
Jacobson said he was pleased by the growth in L.A. Gear’s foreign sales and by the company’s decision to write off $9 million in advertising expenses during the quarter, getting it out of the way. He also said the company’s new line of Street Hikers shoes, promoted by pro football quarterback Joe Montana, are getting off to a good start.
Still, Jacobson said, he is telling investors to stay away from L.A. Gear’s stock. He said the weakening U.S. economy, among other things, raises doubts about how well the company will do in coming quarters.
In addition, L.A. Gear was dealt a blow by the disappointing sales of its new MJ line of shoes, promoted by music star Michael Jackson.
L.A. Gear announced its earnings after the stock market closed. In trading on the New York Stock Exchange, its shares were off 87.5 cents to close at $11.25, just above its 52-week low of $10.75. Shares of L.A. Gear, the biggest gainer on the NYSE last year, have plunged since hitting their all-time high of $50.375 in May.
Other leading sneaker makers have posted mixed results recently. On Tuesday, Reebok International, the nation’s No. 2 firm, estimated that its third-quarter profits were off more than 20%. But Portland, Ore.-based Nike, the No. 1 firm, last week reported a 31% jump in quarterly earnings.
L.A. Gear said it is raising its 1990 advertising budget by 4%, to $68 million, to increase its market share. “These results have been achieved in what we believe is a very difficult retail environment,” Robert Greenberg, L.A. Gear’s chairman and chief executive, said in a prepared statement.
