CNet Will Try Your Patience and Reebok Is Running in Place

Stock Exchange lets readers listen in as staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.


Jim: CNet operates on the Internet, but somehow, Mike, it's gotten a reputation for not being your typical Internet company--or stock.

Mike: That's because CNet actually turned some profits, including second-quarter earnings it announced last week. But it's rapidly going back to being your ordinary Internet company, because it's likely to be in the red pretty soon.

Jim: Launched by its chief executive, one Halsey Minor, CNet is mainly an online provider of information about computers and other tech products, and it helps steer buyers of those items to sellers via several Web sites and cable-television programs.

Mike: Yes, it tries to be a little bit of everything.

Jim: It's based in San Francisco, and though it's growing quickly, it's still pretty small, with revenue expected around $90 million this year. Most of that comes from its sale of banner ads on the Net.

Mike: Which brings us to the same old question with Net stocks: Is advertising ever going to actually produce profits?

Jim: Well, they did briefly in this case.

Mike: And CNet was very proud of itself for that. Then it turned out that it got those profits by skimping on something that every other big Net site must spend on big-time to grow, and that's promotion and advertising. Now CNet realizes it can't work that way anymore.

Jim: Which is why a lot of our readers have heard of, but maybe not CNet.

Mike: That's right. And if you want to know where all of the purported profits of all these great online companies have gone, well, they've gone into the hands of their advertising and promotion departments.

Jim: CNet is now joining the party. It announced plans to spend $100 million over the next 18 months on marketing.

Mike: To build its brand in target markets. In other words, here we are back to the same old story of how so many Net companies are running faster and faster just to hang on by their fingernails.

Jim: A terribly mixed metaphor, but you're right. The idea, of course, is that the marketing expenditures should eventually translate into huge revenue gains, making CNet a bona fide long-term player, even if its profits do evaporate.

Mike: Jim, the problem these companies face--and once again is the poster child for this--is that they're chasing a moving target. The more they spend on promotion, the more the light at the end of the tunnel seems to recede. And you start to wonder if they're ever going to actually reach a critical mass in audience or advertising clout or what have you to make money.

Jim: Notably, though, CNet has been portrayed as being unique, because it's not an Internet search engine or portal or auction house. But let's be real: Its stock has now become a quintessential, volatile Net stock. After a long period of lackluster performance, the stock has more than tripled in just the past year.

Mike: Though it's off a good 20% from its mid-April peak, like most other Net stocks.

Jim: Even so, I'd avoid this stock. It's still overpriced, even as CNet is staring at sizable losses from its marketing campaign. There's also no guarantee, at least today, that the campaign will vault CNet into the major leagues of Internet players.

Mike: I was toying with recommending this stock, which I know my followers out there would consider an irredeemably heterodox move, given my record. But CNet is different in some ways from the common Net company. For one thing, it's part-owner, with NBC, of, which is a search engine-cum-portal that's the centerpiece of NBC's online strategy. Hence, you could make the argument that CNet is also a takeover candidate.

Jim: Heterodox?

Mike: But I keep coming back to the same idea that, even if CNet was taken over--let's say by NBC--the shareholders would not capture the kind of premium that CNet's stock price seems to anticipate. Unless, of course, it's taken over by another online company using its inflated stock.

Jim: You're probably right. Look what happened when Walt Disney Co. recently announced plans to buy the part of Infoseek, the search engine, that it doesn't already own. Infoseek stock fell that day.

Mike: And if anyone out there can figure out what an Infoseek shareholder is actually going to get in that deal, please give us a call.

Jim: There's something else. CNet is about to lose its profitability just as, believe it or not, Wall Street is starting to care about whether these Net companies can make money. So I'm not wild about CNet's timing, either.

Reebok International (RBK)

Jim: This is the well-known sneaker company, of course, and one of Wall Street's perennial laggards. Check this: The stock now trades for $15 and change--less than its price of eight years ago.

Mike: In a way that's appropriate, because it's sales aren't going anywhere, either.

Jim: Frankly, Reebok is a testament to the complacency of boards of directors in this country, because I don't see how you can make the case that Reebok's longtime chief executive, Paul Fireman, has earned the right to keep running this sorry mess. And you would think Fireman of all people would have the incentive to have solved Reebok's problems by now, because he owns 13% of the stock.

Mike: I think you just put your finger on why he's still there. That's a lot of stock to own, and since directors generally own, you know, somewhere around zero-point-something percent of the shares. . .

Jim: . . . marked by that familiar asterisk in proxy statements, meaning less than 1%.

Mike: . . . they're easily intimidated by CEOs who are real owners of the stock, and are consequently willing to let them skate for a while. Now, the thing about Reebok and other big athletic-shoe makers is that they're in a business where the retail markup is the whole ballgame.

Jim: Those $120 sneakers.

Mike: I don't know what foreign country is the center of their manufacturing, Jim, but you know Reebok isn't paying anywhere near $100 per pair of sneakers to the assembly line workers.

Jim: No, and we've already seen how that markup helped turn off consumers. You might remember our chat about Nike a few months ago, and we talked about how the entire market had fallen off. U.S. demand for athletic shoes slumped, and it was even worse overseas. There also was a shift in consumers' tastes away from sneakers and toward other designs of shoes. Reebok also is a major apparel company, and that segment has dropped off, too.

Mike: You know, Reebok strikes me as one of those companies that's always pleading "guilty, with an explanation." If it's not that inventories are out of whack in proportion to sales, then it's that the start-up of some European operation is going slower than expected. And now Reebok is talking about shrinking the top line, which, in the perverse way that Wall Street thinks, is somehow supposed to be a good thing.

Jim: Meaning it's going to lower its sales, to peddle only the most popular stuff.

Mike: In the hope that it can sort of catch its breath and maybe turn a bigger profit. This is all a very tortured way of dealing with some fundamental problems.

Jim: Wall Street clearly has its doubts, though, as you can tell by the stock price. Now, conditions in the industry have started to improve somewhat. Nike's price has rebounded of late. Also, Reebok's had some success with its DMX line of shoes.

Mike: But it's not helping the stock.

Jim: No. And so far, neither is Reebok's strategy of selling other styles of shoes, through its Rockport, Ralph Lauren and Greg Norman brands, among others. So in the end, I can't recommend this stock because I don't see a turnaround at Reebok any time soon.

Mike: Me neither.

Jim: I expect some investors look at Reebok as a potential bargain; it's selling at only 13 times earnings. And there's constant speculation that Reebok is a takeover target. But I wouldn't bet any of my hard-earned cash on this.

Mike: Yes, and until there are some changes in management.


Write or e-mail with a stock you would like to see discussed in this column. Times staff writer James Peltz ( covers the markets and corporate financial trends. Times staff writer Michael Hiltzik ( covers technology and entertainment and is the author of the new book "Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age." Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.

You can hear a preview of Peltz and Hiltzik's weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).



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