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Monday, August 25, 1997
Just for
Feet HOW DID IT FIND TROUBLE? For athletic shoewear retailer Just for Feet, growing pains and soft demand in the sneaker industry put a full-court press on the stock price. With aggressive expansion at a time when unit economics were falling, the stock was headed for trouble. Investors were quick to foul out and head for the locker room. BUSINESS DESCRIPTION Birmingham, Alabama's Just for Feet operates more than 70 superstores nationwide that carry 2,500 to 4,500 styles of shoes. The typical athletic footwear store will carry a fifth of that. The stores feature sports-themed decor and multimedia entertainment, even an in-store basketball court. After a pair of acquisitions in the spring, the company also now has 135 specialty shoe stores, primarily mall-based. Like the larger namesake chain, the smaller outlets also specialize in brand-name athletic and outdoor footwear. WOOLWORTH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: Z)") else Response.Write("(NYSE: Z)") end if %> is a major competitor with its Champs and Foot Locker stores. FINANCIAL FACTS Income Statement 12-month sales: $354 million
12-month income: $21.9 million
12-month EPS: $0.67
Profit Margin: 6.2%
Market Cap: $390.1 million
Balance Sheet*
Cash: $10.2 million
Current Assets: $191.8 million
Current Liabilities: $31.9 million
Long-term Debt: $8.4 million
(*As of Apr. 30,1997)
Ratios
Price-to-earnings: 18.8
Price-to-sales: 1.1
HOW COULD YOU HAVE SEEN IT COMING? Earlier this year when the share price was twice as high, there were signs of industry problems. Fellow retailer FOOTSTAR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FTS)") else Response.Write("(NYSE: FTS)") end if %> had a bleak forecast for sneaker demand back in Marc, and industry-leader NIKE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NKE)") else Response.Write("(NYSE: NKE)") end if %> was soon to follow with warnings of a soft quarter. All the while, Just for Feet was getting away with offensive charging. With its March 17 acquisition of Athletic Attic and May 14 purchase of Imperial Sport, Just for Feet was buying up specialty retailers in an industry that was rimming out. The expansion of its namesake superstores and the acquisitions weighed heavy on a once cash-rich balance sheet. In June the company announced a $100 million debt offering that they had to rescind two weeks later. WHERE TO FROM HERE? Earlier this month the company announced that the July quarter revenues almost doubled. The $0.20 a share analyst earnings estimate, twice the dime per share from the year before, seemed like a can't miss lay up. But on August 20, the company reported net income of only $0.16 a share. Alex. Brown and J.C. Bradford were quick to lower their ratings on the company, even as same-store sales, in a sector that was presumably slumping, were up 4% for the quarter. Margins were the killer. Overhead at the newly acquired mall stores ran high. Operating expenses at the flagship superstores were rising. For a company that had done well building new stores on secondary offering money, becoming a debt-leveraged entity left little margin for error. And they erred. The novelty of becoming a diversified company earlier this year had worn the sole thin. Out of bounds and out of focus, it was a cost management problem waiting to happen. Accepting that analysts have lowered their earning projections to a little under a buck a share next year, isn't a forward P/E in the low teens a bit weak for a company that just grew earnings by 60%? The stock is selling for considerably less than even the 30% long-term growth rate that the analysts project. No doubt the investment community is jaded. They have seen the death of category killers. They have gone through the teething pain of Baby Superstore. They have seen Tandy's Incredible Universe fall into a black hole. They have been run over by Discount Auto Parts. The luster is gone. The formula obvious. Yet earnings are slated to rise more than 40% next year. Will fans come back when Just for Feet hits nothing but net -- income? Could this become next year's double dribble? -Rick Aristotle Munarriz ([email protected])
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