L. A. Gear Runs Hard, but Isn’t Gaining : Footwear: A campaign of boosting cash reserves and replacing executives has yet to stem losses in sneaker market share.
There’s lots of reasons to suggest that Stanley Gold, a corporate turnaround artist, has lost his footing trying to save the ailing sneaker maker L.A. Gear Inc. But it might also be too soon to bet against him.
A year has passed since Gold took over as L. A. Gear’s chairman after Trefoil Capital Investors L. P., a Burbank investor group organized by Gold and Walt Disney Co. Vice Chairman Roy E. Disney, paid $100 million for a 34% stake in the sneaker company.
Trefoil stepped in after Santa Monica-based L. A. Gear suffered a collapse in 1990-91 that was nearly as sudden as the shoemaker’s earlier stellar growth. For Gold and Disney, L. A. Gear’s distress was familiar territory even though they were new to the shoe business.
Another of their partnerships, Shamrock Holdings Inc., has earned more than $160 million in profits over the past decade by investing in troubled companies, turning them around and then cashing out a few years later. Their ventures included Central Soya Co., a soybean processor; Enterra Corp., an oil-services concern, and the music-store chains Sound Warehouse and Music Plus.
L. A. Gear is the first major investment for Trefoil, a so-called “white squire” bailout fund that Disney and Gold formed in 1990 with $450 million raised from investors. But so far, Gold has yet to stop L. A. Gear’s losses and tumbling market share, which he inherited because of past marketing gaffes, poorly made shoes, excessive distribution and an ill-fated apparel division.
In the past two yearA. Gear has lost more than $140 million, and its share of thS. athletic-shoe market has plunged by more than half. The company had nearly 12% of the market in 1990, third behind industry giants Nike Inc. and Reebok International Ltd., which jointly control half the industry. But last year, L. A. Gear fell to fourth (behind Keds) with only a 5% share, the trade publication Sporting Goods Intelligence estimates.
Still, Gold has made major changes at the company, such as improving its cash reserves, selling off inventory and hiring a new executive team. And he bristles at any suggestion that L. A. Gear is a quagmire from which his investment, and reputation, won’t escape intact.
“We’re on or ahead of plan,” Gold, 50, said in an interview. “We’ve probably hit bottom and we now need to build up. We are going to have a successful company with good integrity and good products that makes a profit. There is no question about that.”
Actually, there is a question. Although Gold sharply cut costs, it’s yet unknown how well the company’s new styles will sell this year in the fiercely competitive sneaker market, which of course will determine whether L. A. Gear can clear a profit even with its leaner cost structure.
Small wonder that as of mid-January, more than 1 million of L. A. Gear’s 37 million common shares and equivalents outstanding had been sold short and not yet bought back by investors expecting the stock to drop further. (The stock, which peaked at $50 a share in 1990, closed Monday at $10.125 in New York Stock Exchange composite trading.)
“There’s still a great deal of uncertainty as to where L. A. Gear is going to end up,” said Adele Archer, who follows the company for Standard & Poor’s Corp.
Steven Nichols, chairman of K-Swiss Inc., a smaller but profitable sneaker company in Chatsworth, agreed that “it’s a very big if “ whether Gold can succeed. But Nichols added: “L. A. Gear is under tremendous pressure, and that often breeds success. I wouldn’t count them out at all.”
After suffering a $67.8-million loss in its fiscal year ended Nov. 30, 1991, L. A. Gear says it expects to lose up to $81 million for fiscal 1992--the final figures aren’t out yet--and to keep posting losses through May. L. A. Gear’s fiscal 1992 sales ran about 30% behind the prior year, when they totaled $618 million.
Nonetheless, Gold has pareA. Gear’s once-bloated inventory of 12 million pairs of shoes to about 5 1/2 million, thanks to cut-rate clearance sales. Those reductions and two private sales of securities bolstereA. Gear’s balance sheet. Nearly out of cash in late 1991, the company now has more than $125 million and minimal long-term debt.
Gold also replaced most of L. A. Gear’s management, with his key replacement being Mark R. Goldston, whom he hired from Reebok to be president and chief operating officer. L. A. Gear’s troubled apparel division was abandoned.
The company overall slashed its work force by 35%, to about 850 people, enabling Gold to sharply cut overhead costs. Gold also agreed to work without a salary, although he does have stock options.
(Shamrock Capital Advisors Inc., an affiliate of which Gold is president, also got a $3.8-million “completion fee” when L. A. Gear sold the 34% stake to Trefoil. SCA has a three-year consulting contract with L. A. Gear worth $1.8 million.)
Gold sliced L. A. Gear’s product line to about 250 styles from 500. Production of the remaining styles, which is done overseas, was relocated to other plants because L. A. Gear’s past merchandise was plagued with quality problems.
He also moved from the company’s old headquarters complex in Marina del Rey, where it was inefficiently scattered across several buildings, to a single building in Santa Monica. And L. A. Gear spent about $20 million to settle lawsuits brought against the company by irate stockholders and others.
Indeed, the only major case still pending involves rival lawsuits between L. A. Gear and singer Michael Jackson; both are seeking at least $40 million from each other for alleged breaches of contract. The suits stemmed from Jackson’s endorsement--for an estimated $5-million fee--of a new line of footwear in mid-1990. But the shoes, some laden with buckles, had abysmal sales despite millions more spent on advertising.
The Jackson shoes marked the end oA. Gear’s past glory. Gold succeeded former Chairman Robert Y. Greenberg, who had propelled the company to more than $800 million in annual sales in just a few short years. Its trendy athletic and casual footwear--some with metallic shoelaces, others with colorful designs--particularly caught the fancy of teen-age girls nationwide.
Then L. A. Gear’s new products, particularly its more-expensive shoes, didn’t catch fire. Those that sold carried meager profit margins and were poorly made, damaging repeat sales. Millions of pairs of shoes piled up in the company’s warehouses.
Gold’s recovery plan is to equally divide his business between casual shoes, children’s shoes and athletic footwear.
But in the athletic market, Gold is staring directly at Nike and Reebok, whose marketing budgets dwarf L. A. Gear’s. In 1991, the most recent year available, Nike and Reebok spent $223 million and $127 million on advertising, respectively, according to Advertising Age.
In the performance-shoe niche, some of L. A. Gear’s upscale styles costing $65 or more carry the new “LA Tech” brand name, and some new training and jogging sneakers have small, red safety lights embedded in the heels that blink while people are jogging in the dark. Some of the women’s and kids’ styles also have flashing lights for decoration.
“Innovation is what the consumer is looking for,” Gold said. “We’re not going to copy other people’s brands. We’re going to create our own.”
Even iA. Gear’s lights and other gimmicks appeal to some consumers, “it takes a lot of money to defend your brand” in that sector, said S&P;’s Archer. “L. A. Gear was never known” for its athletic shoes and “there might be credibility problems,” she said.
A key test will come this fall, when Gold’s new management team sees how its overhauled line performs in the critical back-to-school selling season.
Regardless, Gold and Disney, having made money in soybeans, the oil business and record stores--which helped lift Roy Disney’s net worth to $530 million, according to Forbes magazine--think they can still do it in sneakers.
“We’re not going to fall on our faces here,” Gold said. “We like things at the bottom. We will be a very profitable, very admired company in three to five years.”
* L.A. GEAR’S SHRINKING MARKET SHARE 1992
Company % of U.S. Market Nike 30.0% Reebok 24.4% Keds 6.1% L.A. Gear 5.0% Other 34.5%
1990
Company % of U.S. Market Nike 28.7% Reebok 21.4% L.A. Gear 11.8% Keds 5.1% Other 33.0%
Source: Sporting Goods Intelligence * L.A. Gear Inc. at a Glance L.A. Gear Inc. is a Santa Monica-based sneaker maker whose rapid growth stalled almost as quickly as it began. When the company’s troubles mounted in 1991, it sold a 34% stake to a Burbank investor group, Trefoil Capital Investors, formed by Roy E. Disney. Trefoil’s Stanley P. Gold is now trying to revive the company as L.A. Gear’s chairman. For fiscal years ended Nov. 30 Sales: In millions 1992* $350.7 1991 618.1 1990 818.8 1989 589.1 1988 220.7 Net Income (Losses): In millions 1992* $ (42.1) 1991 (67.8) 1990 31.3 1989 55.1 1988 22.0 Total Assets: In millions 1992* $281.3 1991 325.6 1990 364.0 1989 266.6 1988 128.8 Shareholder Equity: In millions 1992* $119.2 1991 131.7 1990 205.9 1989 168.2 1988 41.3 *Nine months ended Aug. 31 Source: Company reports
