Vans Riding High; Aetna on a Tightrope

Jim: Buy

Mike: Buy

Vans (VANS) Jim: Mike, do the names Tony Hawk, Andy MacDonald and Bucky Lasek mean anything to you?

Mike: Let’s see . . . those are the actual names of Moe, Larry and Curly, right?

Jim: I’m not laughing.

Mike: OK, since Tony Hawk’s name is emblazoned on all the kids’ sweatshirts in my house, I’ll venture a wild guess that they’re skateboarding stars.

Jim: Very good, and that brings us to Vans, which sells casual shoes--I guess one can’t call them sneakers anymore--to the 10-to-24-year-old crowd. And it has done so quite well by exploiting this country’s skateboarding craze.

Mike: And give Vans credit: It has managed to sell to the skateboarding crowd without irritating the crowd itself, which is very sensitive about the way it’s portrayed. In other words, Vans doesn’t give skateboarders a feeling that they’re being exploited. These kids simply love their shoes.

Jim: One way Vans has played to its customers is by building skateboard parks around the country, including locally in Ontario and Orange. That not only endears Vans to the board riders, it’s also great publicity.

Mike: We would love to think Vans did this purely as an altruistic step to get kids off the pavement, but in fact Vans sells its footwear out of those parks. Indeed, they’ve become major retail outlets for the chain.

Jim: Vans, incidentally, is headquartered in Santa Fe Springs.

Mike: Which everybody else in Southern California knows principally as a freeway cutoff.

Jim: Now, Vans’ main business is making and selling its shoes through its 140 stores in the U.S. and Europe, and Vans has clearly been a success lately. Here’s just one statistic I find compelling: In the last two years, Vans’ stock has outperformed the stocks of Nike and Reebok by 2 to 1.

Mike: Yet it still sells for an attractive price-to-earnings multiple of about 17 based on current fiscal year earnings estimates.

Jim: Which sounds like you’d buy it.

Mike: Well, um . . .

Jim: Because I certainly would.

Mike: That sounds like a challenge. But yes, I’d buy it, too. Let me tell you a bit of personal history here.

Jim: Do you have to?

Mike: When I moved to Southern California in 1981, I remember someone mentioning Vans, and my responding that I thought it was a supermarket. Having come from the East Coast, Vans was an unknown quantity, though its co-founder, Paul Van Doren, actually had migrated from the East Coast.

But the company has boomed in the ‘90s. Sales have surged from $80 million in 1994 to $274 million last year. Earnings in that period rose from 14 cents a share to 84 cents.

Jim: There’s a caveat with Vans, though. Like any apparel company, it operates in treacherous waters. Just ask Nike and Reebok. The fads and tastes of consumers, especially young people, can change in a nanosecond and if you’re not in step with those changes, you’re in trouble.

But Vans has kept--I’m sorry--in step with the kids and the skateboarding trend, and that’s another reason I like the stock.

Mike: I wouldn’t be surprised if five years from now we might look back at Vans and say, “Gee, amazing how they dropped the ball back in 2003, or whatever.” You’re right, it’s one thing to get your hands around the latest teen craze, and it’s another to keep riding that bronco around the corral.

That said, I like Vans’ strong sales growth, and I can see investors paying a higher price-to-earnings multiple for a piece of Vans’ larger pie in the future.

Jim: Speaking of sales, another number that jumped out at me came in Vans’ fiscal second quarter that ended in November. Its same-store sales--those of stores open at least a year--surged nearly 17% from a year earlier, which is about three times the industry average growth rate.

Mike: I have another concern, even though I’d buy the stock. One is whether Vans’ profit margins will increase consistently. They’ve been suppressed for the last year or so because Vans is selling more in Europe and so has been hurt by the dollar’s strength against the euro currency.

Going forward, there’s also the risk that this company will make the same mistake it made 20 years ago, when it tried to be all things to all people.

Jim: You mean selling more than just shoes?

Mike: I mean having ambitions of competing with Nike, Reebok and everyone else across the entire market of casual footwear. Vans tried that in the early 1980s and flopped. In fact, Vans ended up in bankruptcy, reorganized and started over.

Now, it’s again starting to come out with a broader product line, and you’re beginning to hear some grumbling from investors that Vans ought to stay focused on its core niche.

Jim: I agree with them . . . dude.

Jim: Don’t Buy

Mike: Don’t Buy

Aetna (AET) Mike: In the interest of full disclosure, Jim, this isn’t the best day for me to discuss Aetna.

Jim: Maybe you’ll be more cogent.

Mike: I’ll ignore that. The problem is I’m fighting with my HMO over a bill that I believe it is obligated to pay and yet hasn’t for six months--no doubt out of sheer bureaucratic cussedness.

Jim: Maybe they just lost it.

Mike: “Deep-sixed” it, more precisely. Now, it’s not Aetna I’m fighting with, but aren’t these HMO guys all the same?

Jim: I have a disclosure to make, too. Aetna provides my health and dental insurance. But you’re right. Does it really make a difference what you have?

Mike: Anyway, Aetna is still the nation’s largest health-care provider and it has been through an absolutely horrible few years since it decided to get really big.

Jim: It has 19 million members in health care, 11 million in dental. You get the picture.

Mike: By Aetna’s own judgment, it has about 2 million members too many. To unload them, the company now is discouraging customers by charging higher prices and by withdrawing from various government programs.

Jim: Right. As you point out, this company was until fairly recently a denizen of the intensive-care ward. But it has been taking steps to turn things around.

Mike: So the questions before us are: “Can Aetna be turned around?” and “Do we want to be investors while that process unfolds?”

Jim: My answer is, “No way!” But let’s go over what the company is trying to do, while noting that Aetna already has made some changes that the stock market has welcomed.

First, this is a new stock we’re talking about: In December, Aetna sold its financial services and international business to a Dutch company, ING. The new Aetna stock reflects just the remaining U.S. health-care business.

Now, Aetna is trying desperately to get its earnings up and get the price of the new stock higher. Aetna decided only a couple of months ago that it was going to get out of some unprofitable businesses, including Medicare and some HMO markets it was in. The company also said it would slash its work force by some 5,000 people, which is about 12% of the total.

Mike: My position is that this is a company that is really between a rock and a hard place. It’s like the Southern California Edison of health-care companies.

Jim: How’s that?

Mike: On the one hand, it’s trying to improve its profit margins through some conventional cost- cutting methods--laying off staff, shutting unprofitable lines, shedding unprofitable customers, like Medicare patients, as fast as it knows how. At the same time, it has expressed a determination to improve its relationship with some of its most important constituents: hospitals and doctors.

Jim: Sounds reasonable.

Mike: Yes, but it’s doing all this by claiming to relax its oversight of the medical care doctors and hospitals provide. Now, as we all know--having suffered through a long period of this--companies like Aetna tried to get their profits up by really squeezing doctors and patients, in other words by discouraging all sorts of treatments that doctors were prescribing, and going way overboard.

Jim: This became particularly true after 1996, when Aetna really decided to go into the big leagues and paid through the nose for an outfit called U.S. Healthcare, then one of its competitors.

Mike: The result was that health-care executives became the favorite villains in everything from TV movies to protest ballads. What Aetna is trying to do now really adds new meaning to the term “tightrope.” They’re going to cut back on the medical second-guessing, which means their costs may go up if they pay for more patient services than before.

Here’s the other end of the tightrope: They are going to try to raise premiums. Now, when you do that, as a health-care provider, you invite a condition known as “adverse selection.” That means your service happens to appeal most to the sickest patients--therefore the most costly potential customers.

Jim: There’s a good reason investors may not be optimistic about all of this: Aetna has shown time and again that it cannot streamline the hassles and the bureaucracy that alienate its customers, providers and investors.

Mike: I take it that you don’t believe that laying off a lot of those bureaucrats is going to improve things.

Jim: ‘Fraid not. What’s ironic about our discussion is that, in 2000, HMO stocks did very well. That’s partly because investors were concentrating on the potential for higher premiums at Aetna and other HMOs. But the stocks also benefited as investors made defensive moves to avoid getting creamed in technology stocks.

I don’t think Aetna is going to have the same tail wind in 2001. They are going to get a lot of scrutiny, and I think people aren’t going to like much of what they see.

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Write or e-mail with a stock you would like to see discussed in this column. Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age” (HarperBusiness). Either can also be reached at Business Section, 202 W. 1st St., Los Angeles, CA 90012.

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