Ailing L.A. Gear Seeks Investor to Pump In Cash : Retailing: The once-high-flying Marina del Rey company has lost money two consecutive quarters.
L.A. Gear, struggling to get back on its feet after losing money two quarters in a row, said Wednesday that it is looking for an investor to give it a hand.
The Marina del Rey-based company, which grew explosively the last six years to become the nation’s No. 3 sneaker firm, said it is negotiating with an investment group interested in buying a “substantial” minority stake.
Chief Financial Officer Kevin Ventrudo said that if the deal being discussed falls through, the company’s investment bankers will approach other prospective investors. Ventrudo said he “can’t rule out” a deal to sell the entire company, but that such a deal “is not on the table.”
L.A. Gear has suffered a flurry of legal and marketing problems the past year and, analysts said, it is under pressure to shore up its finances. Under terms of its $300-million credit line from a lending group led by Bank of America, L.A. Gear is required to turn a profit every quarter.
The banks waived the requirement for the fourth quarter of 1990 and first quarter of 1991, but analysts said they are worried that L.A. Gear will be in the red again for its second quarter, which ends May 31.
As a result of the nation’s soft consumer spending and L.A. Gear’s “lack of a real strong product line, I don’t know how they could avoid a loss,” said Josie Esquivel, an analyst with Shearson Lehman Bros.
She added that L.A. Gear needs an outside investor, but “I don’t know if that will be enough” to rescue the company. Still, Esquivel said, she doubted that L.A. Gear will be forced by its banks any time soon to seek bankruptcy.
“The banks want their money, so they’ll be willing to work with them,” she said.
Ventrudo said the banks did not push the company to find an outside investor, but that “we felt some diversification of our capital sources was appropriate given our stage of development.” He added that the company wanted to avoid being “reliant just on bank debt.”
He said the party negotiating with L.A. Gear, which he characterized as an investment group rather than a consumer products firm, would leave the sneaker firm’s management intact. Ventrudo said that if talks continue successfully, he expects the group to seek representation on L.A. Gear’s board.
L.A. Gear said the investment group would gain its stake by buying bonds or preferred stock that could be converted into common stock. The company also said in its news release that it retained Merrill Lynch & Co. as its investment banker “to explore various financial alternatives, including, but not limited to, the identification and solicitation of potential investors in the company.”
For the time being, Ventrudo said, the only kind of deal being pursued would be the sale of a minority stake.
The company’s announcement followed two days of active trading in its stock that pushed the shares up $2.125 to $12.125 Tuesday. On Wednesday, the stock retreated 87.5 cents to $11.25. A year ago, the high-flying stock peaked at $50.375.
L.A. Gear’s financial troubles began last year when the company badly overestimated how many sneakers it would sell, leaving it with a huge inventory of athletic shoes that it has tried to clear out through discount outlets at sharp price cuts. The rash of clearance sales damaged relations with retailers that had sold the firm’s sneakers at regular prices.
The company has pinned some of its comeback hopes on its new Catapult basketball sneakers, which are being promoted with a television ad campaign featuring Utah Jazz star Karl Malone.
The $100 shoes--which have a fiberglass-and-graphite plate and an air cushion in the heel that are supposed to give ballplayers extra spring and comfort--represent L.A. Gear’s first big splash in expensive “technical” men’s athletic shoes. But many retailers have been reluctant to carry them.
A survey by the magazine Sporting Goods Business found that roughly one-third of more than 240 sporting goods retailers that responded planned to stop selling L.A. Gear sneakers. According to the survey, the second hardest-hit company was Brooks, whose shoes are being dropped by nearly 20% of retailers.
At one of the first retailers to offer the Catapult, a two-store chain in the San Fernando Valley named Sneakerland, the shoes are said to have sold quickly. But Sneakerland Manager Harold Surabian said a few customers have returned their Catapults “because they have had problems with the shoe falling apart in the front.”
Surabian said that L.A. Gear is correcting its “production problems” and that he is awaiting a new shipment of the sneakers.
Ventrudo described Catapults’ acceptance among retailers as “good” and said the company’s goal has been to “roll it out slowly.” As for the production problems, Ventrudo said that “any time you have a new technology, there’s always issues with the engineering.”
He pointed to production problems that Reebok, the nation’s No. 2 sneaker firm, has had with its popular Pump, an inflatable air bladder installed in many of its sneakers.
L.A. Gear has also gotten into a legal dispute over the Catapult with sneaker industry leader Nike, which contends in a patent-infringement suit that the shoes use a “spring moderator” system that Nike developed.
Among L.A. Gear’s other problems have been the apparent fading popularity of many of its sneakers, and the flop of a much-ballyhooed line promoted by pop star Michael Jackson.
To cut costs, Ventrudo said, L.A. Gear has cut its employment to 1,400 from a peak of 1,700 last year. Robert Y. Greenberg, the onetime hairdresser who is L.A. Gear’s founder, chairman and chief executive, disclosed in March that he would work without pay until the company turned a profit again. He was paid $3.47 million in cash compensation last year.
L.A. Gear posted its first quarterly loss ever as a publicly held company in the final three months of 1990, $7.1 million. For the year, the company’s net income fell 43% to $31.3 million on revenue that rose 46% to $902.2 million.
In the first quarter, L.A. Gear lost $12.5 million on sales that fell 8.8% to $170.9 million.
