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Friday, November 6, 1998
Venator Group Inc.
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Phone: 212-553-2000
Website: www.footlocker.com
Price (11/5/98): $9 1/2
HOW DID IT FIND TROUBLE?
If there was any truth in advertising, Venator would have to make some changes to its athletic footwear and apparel chains to appease its shareholders. Foot Locker would be slammed shut. Champs? I don't think so.
Times have been rough for the former Dow Jones 30 stock. Last year, the company closed down its once prolific Woolworth chain. Brother, can you spare a five and dime? Things got even worse last month as Venator also had to close down its Kinney and Footquarters stores. That's right South Park fans, Venator has killed Kinney. This is a troubled retailer that has had to turn out the lights on its ailing properties and swallow the one-time charges because no one is willing to buy them at any price.
This is also the same company that last month had to call off its pending marriage with The Sports Authority <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TSA)") else Response.Write("(NYSE: TSA)") end if %>. With both companies suffering from tumbling share prices in an out of favor sector, the mutual split at the altar was troubling. They might very well be just friends now without the merger, but apparently misery doesn't love company. And Wall Street just doesn't love this company.
BUSINESS DESCRIPTION
New York-based Venator owns Champs Sports, Foot Locker, Lady Foot Locker, and Kids Foot Locker. All are primarily mall-based retailers specializing in athletic sportswear with an emphasis on footwear. The company also owns Afterthoughts, a young jewelry store concept.
FINANCIAL FACTS
Income Statement
12-month sales: $6516 million
12-month income: $170 million
12-month EPS: $1.12
Profit Margin: 2.6%
Market Cap: $1286.3 million
Balance Sheet
Cash: $77 million
Current Assets: $1721 million
Current Liabilities: $1248 million
Long-term Debt: $536 million
Ratios
Price-to-earnings: 8.5
Price-to-sales: 0.2
HOW COULD YOU HAVE SEEN IT COMING?
Earlier in the year, the planned merger with Sports Authority seemed almost a necessity. The Sports Authority was suffering through the growing pains that so many category killers like Baby Superstore and Just for Feet <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FEET)") else Response.Write("(Nasdaq: FEET)") end if %> had suffered in the past -- trying to grow too fast too soon. Meanwhile, Venator needed a superstore sister concept to help diversify from its footwear dependency and diminutive mall-based sites.
For those who have suffered with Nike <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NKE)") else Response.Write("(NYSE: NKE)") end if %> over the past year and a half, it was clear that something was amiss. Fashion was moving away from the Air Jordans and athletic shoes and into the soles of earthy Timberland knock-offs.
Of course, nothing is as simple as a young culture flocking to the "brown shoe." If that were the case, Venator wouldn't have shuttered its Kinney stores. No, the problem is a familiar retailing woe -- discounting. Just as Wal-Mart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %> is hurting Toys R Us <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TOY)") else Response.Write("(NYSE: TOY)") end if %> in the toy market, the environment has been no kinder in athletic footwear. Even the suppliers, including Nike of all companies, have had to give up some of their Air Margins and give in to the cutthroat competition.
While The Sports Authority had much more to offer than a pure sneaker superstore like Just for Feet, the bad vibes reverberated throughout all sporting good categories, with lower same-store sales for the jilted Sports Authority chain.
But both companies seemed as if they were made for each other, in sickness and in ill-health. On July 7 both companies preannounced lower-than-expected earnings. Venator, in a throwback to its Woolworth five and dime store days, announced that second quarter earnings would come in, that's right, between $0.05 and $0.10 a share -- well below the $0.21 projection.
That dropped Venator below $20 1/2, which was the walkaway price on the deal. It may not have mattered except for the fact that Gart Sports <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GRTS)") else Response.Write("(Nasdaq: GRTS)") end if %> had offered a cash buyout bid for Sports Authority that was looking better and better. Both companies waited more than two months later to officially call off the deal -- even though The Sports Authority has yet to run into the waiting arms of Gart.
All during the courtship, investors could have sensed that things were going wrong. From Nike's ongoing problems to a sector engaged in costly price wars, this was not the place to RSVP -- with or without a wedding party.
WHERE TO FROM HERE?
Are these comfortable shoes here? While analysts are all over the map on what Venator will earn this year, it is interesting to note that even despite recent downward revisions, the six analysts making guesstimates have mean estimate of $1.24 a share next year. That has the stock selling at under 8 times it's current price.
That does not mean the time is ripe to lace up your cleats and charge right on in. Looking over fellow rubber morgues like Footstar <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FTS)") else Response.Write("(NYSE: FTS)") end if %>, Finish Line <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FINL)") else Response.Write("(Nasdaq: FINL)") end if %>, and Just for Feet shows an entire sector that is showing no signs of bouncing back into favor any time soon.
The earnings forecasts can certainly head lower, and they probably will given slipping consumer confidence and an NBA lockout possibly reducing the marketing muscle of athletic footwear's greatest endorsers.
With the holidays coming up we will get a clearer picture of the industry. Was the soft back-to-school selling season a fluke? Will Michael Jordan hit the hardcourt in a pair of hiking boots? In the end, the margin crunch of having lower markups on the goods and dealing with higher labor costs may be the best thing for the retailers who survive these lean times to face less competition in the years ahead. Sometimes endurance and persistence are what win the game.
-Rick Aristotle Munarriz
([email protected])
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