After a wild three-year ride that saw its stock go from $15 to $106 since 1994 and back to $29.75 last week, Fila Holding SpA finds itself in a situation that its shoe endorser Eddie Murray might remember from the week-long drought before his 500th home run last year.
They need a big hit. Badly. Soon would be nice.
The Italian athletic shoe company, whose U.S. headquarters are in Sparks, continued to get pounded on Wall Street last week after announcing that second-quarter earnings would fall short of last year's results and what analysts had expected for the quarter.
The decline will be Fila's first since going public in 1993, and it poses a big question about a company that has seen its sales jump from $349 million in 1992 to $1.4 billion last year.
Is the party over?
"To suggest the party is over is far from accurate," Fila USA Senior Vice President Howe Burch insists. "We've got a business that's up 29 percent [in the first quarter] because our international business is strong. Isn't their money green?"
Indeed, no one is saying Fila is in real trouble. When experts talk about Fila's problems, they don't compare them to legendary sneaker-business flameouts such as L. A. Gear. Instead, the comparison they make is to Reebok International Ltd., the No. 2 sneaker company in the world but a near-laughingstock as recently as a year ago, when it lost 15 percent of its U.S. athletic shoe business.
Reebok has firmly re-established itself in Wall Street's heart on the success of a couple of hot-selling shoes. Even though Reebok's earnings so far have remained poor, it has racked up decent growth in retailers' summer orders and management has begun to improve its image.
For now, however, the news from Fila isn't even that good. The company says it will earn between 53 cents and 60 cents per American depositary share for the second quarter, down from 98 cents last year and well below the 89 cents Wall Street had predicted. That follows a first quarter when Fila's profits rose 14 percent but fell short of expectations for the first time since at least 1994.
Some of the bad news is clearly an industry phenomenon: U.S. sneaker sales, now the slowest-growing part of Fila's business, are expected to rise only 4 percent, according to the National Sporting Goods Association, compared to 10 to 12 percent last year. The slowdown has also hurt industry leader Nike Inc., which has said its earnings for the quarter ended in May will be short of Wall Street's numbers.
Another part of Fila's problem is driven by Wall Street itself. Fila shares have been under attack from short sellers, aggressive bearish investors who borrow a company's stock in hopes that the share price declines so they can buy the shares at a lower price.
Almost 2.7 million shares of Fila are sold short, according to statistics released Thursday by the New York Stock Exchange. But the short interest is down by more than half a million shares from the peak in March, indicating that some shorts have taken profits as Fila performs down to their expectations.
Short sellers are now shifting their aim to Fila rivals, including Converse Inc. and Nike.
While both the shoe market and the stock market may be hostile, Fila's most fundamental problem is its products, said John Horan, editor of the industry newsletter Sporting Goods Intelligence.
Fila's stock skyrocketed because its shoe designers turned out winner after winner, beginning with the first shoe endorsed by Detroit Piston star forward Grant Hill in 1995. Finally, last fall, one product did bust, when the Hill III shoe performed below expectations and was heavily discounted at retail. Fila stock fell last autumn, bounced back in December and January, then collapsed further after Fila cut the price of its new shoe endorsed by Philadelphia 76er guard Jerry Stackhouse, which the company had promoted with heavy advertising, including its first-ever Super Bowl spot.
"There's a little overall softness, but it's more brand-specific than an industry issue," said Horan, pointing to a strong first quarter at Converse and signs of a strong mid-1996 from Reebok. "For years, Fila took sales from Reebok and Converse. Now it's kind of the other way."
What's worse for Fila is that the slowdown highlights weaknesses in its product line that it has been pledging to fix at least since its U.S. senior executive vice president for footwear, Robert Liewald, arrived from FootLocker, Fila's biggest customer, in 1995.
Liewald pointed out shortly after arriving that Fila was too dependent on its reputation for fashion and not strong enough in the technology that would give it a reputation as a "performance" shoe. A performance image would make Fila much less vulnerable to the shifting whims of teen-agers.
Burch said Fila is trying to fix that. In the last six months it has opened design centers in Oregon, Colorado and Italy and recruited two dozen top shoe designers from Portland, Ore.-based competitors like Nike and adidas AG's U.S. arm, plus a key European running-shoe designer from adidas.
They are working on pushing Fila from its concentration in basketball shoes toward bigger positions in segments such as running and cross-training. In particular, they are overhauling the 2A sole insert that is Fila's answer to cushion technologies such as Nike Air.
"They need to get that new technology system out there as fast as possible and get behind that" with heavy advertising, Horan said.
Gruntal & Co. analyst Michael Conn says Fila's key mistake may have been not speeding up product development and marketing spending even more when times were good. Boosting spending sooner would have depressed last year's earnings, but Fila still would have met expectations, Conn reasons.
The bonus would have been easier-to-meet earnings comparisons this year and more performance-oriented products on the market sooner. "It's difficult to fault them on the direction they are taking," Conn said. "In retrospect, they didn't act soon enough."
Pub Date: 6/22/97