There's Something Afoot at Skechers

By LESLIE EARNEST

June 16, 2002 12 AM PT

TIMES STAFF WRITER

A decade after being pushed aside by footwear maker L.A. Gear, the founders of Skechers USA Inc. have impressed Wall Street and industry insiders with a resounding comeback.

Chief Executive Robert Greenberg and his son Michael Greenberg, the company’s president, have created a footwear company that, by flouting industry formula, has boldly strode into the No. 3 U.S. sales slot behind Nike Inc. and Reebok International.

The Manhattan Beach-based company has gained traction in a slippery economy by designing for all kinds of shoe buyers--men, women, teens and kids--and all kinds of tastes with 1,500 styles, including athletic shoes, clunky boots, basic brown shoes, trendy platforms, steel-toed sneakers, fuzzy slippers and even shoe skates. By comparison, the average shoe maker has 100 to 200 selections and usually is identified with a specific type of shoe, analysts say.

Overall footwear sales have been sluggish to negative for 18 months, according to the American Apparel & Footwear Assn. in Arlington, Va. But Skechers’ sales grew 42% in 2001 from the previous year and rose about 8% in the first quarter of 2002, compared with the year-earlier period.

While broadening its base and often selling shoes at lower prices than its competitors, Skechers has paid special attention to young women, who tend to buy shoes for all members of the family while shopping for themselves.

“So you’re outfitting the whole family,” said Michael Pachter, a Wedbush Morgan Securities analyst. “It’s a brilliant strategy, and I’m absolutely shocked that no one else has figured it out.”

But some analysts remain cautious about Skechers, because this is an industry in which styles shift rapidly, a brand’s cachet can dim suddenly and even a seasonal fluctuation will pluck profits from the bottom line. Skechers is competing against a daunting array of rivals, including Adidas-Salomon, Steven Madden Ltd. and C&J; Clark International Ltd.

Further, Skechers aims its styles mainly at teens and young adults, always a dicey prospect, said Roz Bryant, an analyst with Morningstar Inc.

“That’s a group whose taste can swing rather widely,” she said. “So that is definitely a risk in looking at Skechers as a stock. The share price is likely to move up and down as the company hits and misses with its customers.”

And it’s been mostly hits. Skechers stock closed at $22.10 on Friday, down 5 cents on the New York Stock Exchange. The share price has climbed about 50% this year, but still is down 28% compared with a year ago.

Earnings, meanwhile, tumbled about 50% in the third and fourth quarters of 2001, prompting the footwear maker to implement cost-cutting measures, including firing about 5% of its work force of 2,000.

But with sales nearing $1 billion, Skechers has pulled into an enviable position within the industry, analysts say. It logged a strong first quarter and has boosted financial projections for the year. A recent report by Smartmoney.com named Skechers one of 16 attractively valued small-cap companies with “solid growth prospects.” This month, Skechers made Business Week’s top 10 list of “hot growth companies.”

Skechers “has done a very good job of really becoming a big player in this market,” said Steven Richter, an analyst with Wellington Management. That’s partly because it is quick to react to consumer sentiment, retail experts say.

When clunky shoe styles cooled last fall, Skechers immediately launched a “sexy and frivolous” line called Skechers by Michelle K, targeting trend-conscious 18-to-34-year-old women, said Ellen Campuzano, president of the Committee For Colour & Trends, a New York trend-tracking firm. The line retailed at $60 to $250 a pair, while a new juniors line launched about the same time sold for $20 to $70.

“Stupid they’re not,” Campuzano said, adding that the footwear maker, which also operates 85 stores, has become so adept at mimicking hot new styles that other companies increasingly copy theirs. “Everybody wants to knock off their good shoes.”

CEO Robert Greenberg, 62, says Skechers “interprets categories” but doesn’t “knock off styles.”

In any case, the Greenbergs are having an effect on the industry, said Fawn Evenson, vice president of the American Apparel & Footwear Assn. “To take this company and make it a premier brand, I think people just look at it in awe.”

Clearly, the Greenbergs are resilient. And plentiful. Robert Greenberg’s four other sons and a daughter also work for the company, along with a niece and a nephew.

The siblings, who live in Manhattan Beach, socialize and vacation together. But shop talk often dominates and they can be a bit single-minded, said Jeffrey Greenberg, 34, a company director who is in charge of TV advertising. If they gather at a restaurant, for example, “we watch feet as everybody’s going out,” he said.

Retail a Tradition

in Greenberg Family

The family’s retail roots stretch back to the 1930s when Harry Greenberg, Robert’s father, opened Belle’s Market in Boston, a grocery store named for his wife. Robert Greenberg’s career has included importing wigs, selling denim and running a chain of roller-skating stores.

Michael Greenberg, 39, was 8 years old when he began trailing his father to work, rising early to accompany him to a warehouse or office and napping afternoons on corrugated boxes or under the conference table.

At 9, he discovered the financial upside of hanging out with dad when a secretary, trying to occupy him, asked Michael to put labels on invoices, promising to pay him $7 a box and figuring he would be lucky to finish one. He made $130.

Jeffrey Greenberg remembers working summers with his father at the Wild Oats Jeans Co. warehouse in Boston, taping boxes and “riding around on the conveyer belt” while his dad did “the boring stuff” in an office.

In 1978, Robert Greenberg moved his family to California, where he picked up the Hang 10 license for shoe skates. Once he realized that it was the “uppers” that held the most promise, Greenberg began focusing on shoes instead of skates and, in 1983, L.A. Gear was born.

The brand took off, making a hit with teens and young women and getting a boost from the red-hot aerobics craze. Michael quit college to join his father in the business. In 1986, Robert Greenberg bought out his partner and took the company public.

L.A. Gear soon became the nation’s third-largest footwear seller, but it began to struggle as it tried to move into “performance” athletic shoes and apparel and failed to shift rapidly enough with fashion trends. In 1991 sales plunged 25%, resulting in a $45-million loss.

The next year, investors rode in, dumping $100 million into the company for a 34% stake. Before long, the Greenbergs were out.

“At the end of the day, the philosophies did not marry up,” Michael Greenberg said. “It made sense for the Greenberg family to depart ... without a fight.”

In December 1992, L.A. Gear announced that former executives, including Robert Greenberg, had agreed to pay $29.3 million to settle a shareholder lawsuit. The lawsuit, which involved stock purchases made from 1989 to 1991, alleged that company officers had violated securities laws by issuing misleading statements meant to boost the stock price. The defendants said the settlement was not an admission of guilt.

L.A. Gear filed for Chapter 11 bankruptcy protection in 1998 and continues to operate as a footwear company in Los Angeles.

Once they left L.A. Gear, the Greenbergs didn’t waste much time worrying about their predicament.

“We sat on the couch for maybe a week,” Michael Greenberg said. “But in that week, we were talking about our next move.”

Six months later, they co-founded Skechers, importing the clunky Dr. (Doc) Martens work boots and shoes from a British maker and selling them for $90 to $134.

The new company’s name--which in teen lingo means someone who is antsy and can’t sit still--was suggested by Josh Greenberg, now 29, who helps his father with product development.

“I didn’t think it would work,” Robert Greenberg said. But when his daughter’s girlfriend offered the same suggestion, he changed his mind.

L.A Gear Experience

Blazed Trail to Success

Soon, Skechers was making its own work boots for men, women and children and selling them at retailers such as Foot Locker, Macy’s and Nordstrom. The business went public in June 1999 with 30 stores. Today, its stores make about 10% of its sales, and there are plans to open at least a dozen more outlets this year.

Robert Greenberg said the experience and contacts he developed at L.A. Gear have helped fuel Skechers’ success. And, despite the similarities of the two companies, the Greenbergs say Skechers is not destined to follow in L.A. Gear’s footsteps. L.A. Gear was hampered by its image as a women’s aerobics shoe, Michael said, while Skechers has branched out.

It is almost impossible to compare Skechers with any of its competitors, analysts say, because its products spread across more categories than any other footwear company. Nike, for example, is considered an athletic shoe company, while Timberland Co. is known for its hiking shoes and Kenneth Cole Productions Inc. is seen as a dress and casual shoe company, said Dorothy Lakner, an analyst with CIBC World Markets.

Skechers keeps its name in the limelight by featuring celebrities in its advertising, including actors Robert Downey Jr. and Matt Dillon and Lakers basketball star Rick Fox. It recently signed a three-year advertising contract with singer Britney Spears and began selling Skechers Britney 4 Wheelers roller skates in stores this month. Skechers advertises in more than 100 U.S. magazines each month.

The company also is pumping advertising into the European market because international sales are considered key to Skechers’ future growth. It is opening more stores and showrooms abroad and has taken control of its European distribution centers. International sales rose by more than 65% in the first quarter and account for more than 13% of total sales, which the company says could grow to as much as 30% over the next three to five years. “The potential is enormous,” Robert Greenberg said.

But challenges lie ahead. The plethora of styles has resulted in inventory backups that are higher than the industry average, which can pose problems when sales soften, analysts say. At the end of last year, Skechers’ inventory was up 40%, a situation that has since improved.

Nike may go after Skechers’ sneaker business with its new Hurley brand, a hot apparel name among surfers and skateboarders, said Joseph Teklits, an analyst with Wachovia Securities, who reiterated his “buy” rating on Skechers stock Thursday.

Nike spokeswoman Leslye Mundy declined to say Friday whether Nike plans to make shoes with the Hurley brand.

“When this is communicated by Nike, it could be a problem for [Skechers] shares,” Teklits said.

And analyst Bryant said the fact that Skechers’ five largest customers accounted for more than a quarter of its total sales in 2001 “should give people pause.”

The Greenbergs, however, sound confident about the future. The family unit has strengthened the company, Michael and Robert Greenberg say.

“The hard part is, you don’t want to fail under any circumstances,” Robert Greenberg said, “because everybody fails.”

(BEGIN TEXT OF INFOBOX)

Fathers and Corporate Families

Some prominent companies in which a father and one or more of his offspring are in key executive positions:

* Comcast Corp.

Father: Ralph J. Roberts, chairman

Son: Brian L. Roberts, president

* News Corp.

Father: K. Rupert Murdoch, chairman and CEO

Sons: James R. Murdoch, executive vice president and CEO of Star TV unit

Lachlan K. Murdoch, deputy chief operating officer