DJIA 9211.84 +50.07 (+0.55%) S&P 500 1118.86 +3.07 (+0.28%) Nasdaq 1866.18 +6.02 (+0.32%) Value Line ndx 983.00 +0.37 (+0.04%) 30-Year Bond 102 18/32 +14/32 5.94% Yield
EchoStar Communications Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DISH)") else Response.Write("(Nasdaq: DISH)") end if %> picked up $3 1/2 to $31 after the digital broadcast satellite (DBS) programmer said the Justice Department "made the right decision" yesterday in blocking rival Primestar Partners' $1.1 billion purchase of American Sky Broadcasting (ASkyB) from News Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NWS)") else Response.Write("(NYSE: NWS)") end if %> and MCI Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MCIC)") else Response.Write("(Nasdaq: MCIC)") end if %>. Primestar is a partnership among TCI Satellite Entertainment <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TSATA)") else Response.Write("(Nasdaq: TSATA)") end if %>, Time-Warner <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TWX)") else Response.Write("(NYSE: TWX)") end if %>, Media One Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UMG)") else Response.Write("(NYSE: UMG)") end if %>, Comcast Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CMCSA)") else Response.Write("(Nasdaq: CMCSA)") end if %>, and Cox Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: COX)") else Response.Write("(NYSE: COX)") end if %>. ASkyB holds one of three satellite slots capable of transmitting DBS signals to the U.S., while EchoStar and the DirecTV unit of Hughes Electronics' <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GMH)") else Response.Write("(NYSE: GMH)") end if %> own the other two. In forbidding the sale, top trustbuster Joel Klein said cable companies such as Time-Warner and Comcast have "the least incentive" to buy the DBS slot since it would erode their monopoly power, suggesting that Primestar's interest in ASkyB is anticompetitive.
Automaker Ford Motor Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %> motored ahead $2 7/16 to $48 3/16 on speculation it may be looking for an international merger partner following Chrysler's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: C)") else Response.Write("(NYSE: C)") end if %> decision last week to merge with Daimler-Benz <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DAI)") else Response.Write("(NYSE: DAI)") end if %>. Yesterday, Ford denied a newspaper report suggesting it was interested in acquiring Italy's Fiat SpA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FIA)") else Response.Write("(NYSE: FIA)") end if %>. Separately, Ford filed a shelf registration for $2.3 billion in debt securities, the proceeds of which will be used for general corporate purposes. Hypothetically, Ford could combine those securities with a previously filed $700 million in securities and put the cash toward a purchase. A Ford spokesman told Reuters that the company has not ruled out an acquisition if the partner offered various synergies at an attractive price. Meanwhile, the #2 American automaker reported a 1.1% increase in vehicle sales in April.
Data networking products maker Bay Networks <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAY)") else Response.Write("(NYSE: BAY)") end if %> jumped $3 3/4 to $27 3/4 today after the company said that it has rejected a takeover offer from telecom equipment powerhouse Northern Telecom <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NT)") else Response.Write("(NYSE: NT)") end if %>. The news about the NorTel offer is a pretty good indication that Bay is being shopped and will be sold if the price is right, perhaps to NorTel if the Canadian giant is willing to boost its bid. The acquisition of Bay would fill out a giant hole in NorTel's data networking product line, where now it's pretty much an integrator of other companies' products.
QUICK TAKES: Software giant Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> rose $1 1/4 to $86 15/16 after a federal appeals court said the Justice Department's chances of stopping the release of Microsoft's Windows 98 operating system are "very weak" based on a court decision issued last year relating to the company's Windows 95 operating system... Information technology consultant Complete Business Solutions <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CBSL)") else Response.Write("(Nasdaq: CBSL)") end if %> tacked on $1 23/32 to $25 3/4 after the company said it "knew of no reason" for the 21.5% decline in the company's share price yesterday. CEO Raj Vattikuti said the company's business fundamentals are "unchanged," adding that he bought 79,000 of the firm's shares over the past few days... Video communications products developer C-Phone Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CFON)") else Response.Write("(Nasdaq: CFON)") end if %> soared $6 15/16 to $9 3/4 after introducing an Internet set-top box to provide Web access via TV using an analog phone line.
Trans World Entertainment Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TWMC)") else Response.Write("(Nasdaq: TWMC)") end if %>, which operates the Record Town and Coconuts Music and Movies retail outlets, climbed $3 1/2 to $33 7/8 after reporting Q1 EPS of $0.12, walloping the First Call mean estimate of $0.03... Semiconductor and cellular phone maker Motorola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOT)") else Response.Write("(NYSE: MOT)") end if %> rose $3 1/2 to $59 3/8 on speculation that Germany's Siemens A.G. would make a bid for the company. After Siemens said it was not interested, more rumors surfaced that French telecommunications equipment firm Alcatel Alsthom <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALA)") else Response.Write("(NYSE: ALA)") end if %> may have its eyes on the company... British telecommunications services provider Colt Telecom Group PLC <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COLTY)") else Response.Write("(Nasdaq: COLTY)") end if %> rose $13 to $113 1/2 after reporting its Q1 gross profit more than doubled from the same period a year ago to about $10.6 million.
Republic Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RII)") else Response.Write("(NYSE: RII)") end if %> advanced $1/2 to $27 1/8 after saying it would sell a 25% to 30% stake in its Republic Services solid waste business in Q2 or Q3 of fiscal 1998. The company will spin off the remaining stake in the unit to its shareholders in fiscal 1999. Republic is featured in today's installment of Dueling Fools... Hotel operator Marriott International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MAR)") else Response.Write("(NYSE: MAR)") end if %> rose $2 5/8 to $33 1/8 after a federal court postponed the trial of Marriott's suit to stop Patriot American Hospitality's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PAH)") else Response.Write("(NYSE: PAH)") end if %> merger with Interstate Hotels <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IHC)") else Response.Write("(NYSE: IHC)") end if %>. Patriot American and Interstate said they would use the delay to continue settlement talks with Marriott... Telephone customer service outsourcer SITEL Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SWW)") else Response.Write("(NYSE: SWW)") end if %> added $7/16 to $7 13/16 after Michael May stepped down as CEO and handed the reins to current president Phillip Clough.
ServiceMaster Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SVM)") else Response.Write("(NYSE: SVM)") end if %> gained $1 9/16 to $31 1/16 after Morgan Stanley Dean Witter started coverage of the lawn care, pest control, and facilities management services company with an "outperform" rating and a 12-month price target of $37 per share... Catalog retailer and database marketing firm Fingerhut Companies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FHT)") else Response.Write("(NYSE: FHT)") end if %> advanced $1 13/16 to $32 after its CEO Theodore Deikel told Reuters yesterday that the company is "in great shape" and comfortable with the Street's fiscal 1998 earnings estimate of $1.76 per share... Semiconductor fabrication systems supplier Applied Materials <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMAT)") else Response.Write("(Nasdaq: AMAT)") end if %> gained $1 9/16 to $39 1/2 after reporting Q2 EPS $0.37 after the bell yesterday, which was in line with the First Call mean estimate.
Operator of elderly healthcare facilities Vencor Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VC)") else Response.Write("(NYSE: VC)") end if %> added $1/2 to $12 3/16 after agreeing to sell 21 hospice agencies to privately held VistaCare USA Inc. for an undisclosed sum. The company is also selling 11 of its 21 home care units to Caretenders Health Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CTND)") else Response.Write("(Nasdaq: CTND)") end if %>... Total Renal Care <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TRL)") else Response.Write("(NYSE: TRL)") end if %> moved up $1 1/4 to $31 9/16 after the provider of dialysis services was placed on Donaldson, Lufkin & Jenrette's "recommend list" with a 12-month price target of $45 per share... Osteotech Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OSTE)") else Response.Write("(Nasdaq: OSTE)") end if %> picked up $1 9/16 to $21 7/8 after BancAmerica Robertson Stephens upgraded the maker of orthopedic, neurological, and surgical products to "strong buy" from "buy"... Vical Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VICL)") else Response.Write("(Nasdaq: VICL)") end if %> added $1 3/16 to $17 11/16 after BancAmerica Robertson Stephens started coverage of the cancer drug developer with a "buy" rating.
Luggage maker Samsonite Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SAMC)") else Response.Write("(Nasdaq: SAMC)") end if %> climbed $15/16 to $29 7/8 after saying it will repurchase up to 12 million shares, or about 59% of its outstanding common stock, at a price of $40 per share as part of a recapitalization plan. The share repurchase plan will take the place of a previously announced special dividend of $12.50 per share... Online auctioneer Onsale Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ONSL)") else Response.Write("(Nasdaq: ONSL)") end if %> rose $5 5/16 to $29 15/16 after BancAmerica Robertson Stephens analyst Keith Benjamin reiterated his "buy" rating on the stock... Digital pre-press services provider Applied Graphics Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AGTX)") else Response.Write("(Nasdaq: AGTX)") end if %> added $3 to $49 1/8 after reporting Q1 EPS of $0.30, beating the Street estimate by a penny.
Cephalon <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CEPH)") else Response.Write("(Nasdaq: CEPH)") end if %> dropped $3 3/8 to $11 3/8 in heavy trading after announcing that the FDA has said the Myotrophin injection the biopharmaceutical company jointly developed with biotechnology firm Chiron Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CHIR)") else Response.Write("(Nasdaq: CHIR)") end if %> is "potentially approvable" for the treatment of Lou Gehrig's disease but has asked for more data showing the drug is effective. Chiron was down $1/4 to $20 7/16. This unusual "maybe" signal is driving speculation that the drug won't be approved. Cephalon took a harder hit for this latest development than Chiron because FDA approval is more crucial for money-losing Cephalon, which has yet to have a drug approved and itself states in its annual report that the company's success depends on obtaining FDA approval. A year ago, an FDA advisory panel recommended against approval of the drug due to questions about its effectiveness after an European study failed to back up the results of the U.S. study. Doctors and patient groups, however, have been pressuring the FDA to approve what would be only the second drug for the debilitating disease that affects roughly 30,000 Americans. Cephalon and Chiron issued a statement saying they plan to meet with the FDA to "clarify the conditions for approval and to determine whether these conditions can be satisfied."
Information technology education and training company Learning Tree International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LTRE)") else Response.Write("(Nasdaq: LTRE)") end if %> plunged $4 3/8 to $19 1/8 after reporting second quarter earnings of $0.10 per share, which is the same as a year ago and in line with analysts' expectations. This comes despite revenue growth of 26% to $45 million. The company said it is continuing to focus on improving operating and net income through revenue growth and cost containment. The less-than-spectacular results prompted several brokerages to downgrade the company's stock. Salomon Smith Barney lowered its rating to "neutral" from "buy," BankAmerica Robertson Stephens cut its rating to "market perform" from "buy," and ABN-AMRO switched to "hold" from "buy." ABN-AMRO, expecting Learning Tree's revenue growth to slow significantly in the next few quarters, cut its EPS estimate to $0.47 from $0.65 for this year and to $0.80 from $0.90 for next year.
QUICK CUTS: SBC Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SBC)") else Response.Write("(NYSE: SBC)") end if %> was disconnected for $1 3/8 to $38 1/16, while Ameritech <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AIT)") else Response.Write("(NYSE: AIT)") end if %> was cut $2 1/8 to $43 1/2 after two Senators who head the Senate Judiciary Committee's antitrust subcommittee called for an "extensive review" of SBC's proposed purchase of Ameritech... Kmart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KM)") else Response.Write("(NYSE: KM)") end if %> slipped $15/16 to $18 1/16 after reporting Q1 EPS of $0.10, up from $0.03 last year and a penny higher than estimates. The company said, "We continue to feel good about the turnaround momentum at Kmart"... Golf equipment maker Callaway Golf Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ELY)") else Response.Write("(NYSE: ELY)") end if %> scored another bogey, losing $2 1/4 to $20 5/8 after warning that it expects Q2 results will be below current analysts' estimates. Sales and earnings continue to be affected by soft sales of metal woods as well as worsening economic problems in Asia.
Home merchandise and furnishings retailer Bed Bath & Beyond <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BBBY)") else Response.Write("(Nasdaq: BBBY)") end if %> shed $2 5/16 to $51 15/16 after announcing that Co-CEOs Warren Eisenberg and Leonard Feinstein and their respective family trusts, as well as charitable foundations, have sold a total of 2 million shares... Network and desktop integration and services company Wang Global <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WANG)") else Response.Write("(Nasdaq: WANG)") end if %>, the new company combining the operations of Wang Laboratories and Olsy, fell $13/16 to $25 7/16 after reporting Q3 EPS of $0.08 (before charges; net loss was $1.22), missing the analysts' mean EPS estimate of $0.10... Children's apparel and accessories manufacturer Gymboree Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GYMB)") else Response.Write("(Nasdaq: GYMB)") end if %> tumbled $1 5/16 to $17 1/16 after reporting Q1 EPS of $0.17, down from $0.34 last year. Analysts had expected $0.23.
Mental health programs and services developer PMR Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PMRP)") else Response.Write("(Nasdaq: PMRP)") end if %> tanked $3 to $10 1/2 after announcing it expects to report Q4 EPS from operations of $0.11 to $0.14 (excluding charges) compared with the analysts' mean estimate of $0.18. With charges, the company's net loss would range between $0.25 and $0.28 per share... Financial planning and tax preparation company Gilman & Ciocia <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GTAX)") else Response.Write("(Nasdaq: GTAX)") end if %> dropped $2 5/16 to $21 13/16 after announcing it will acquire Philadelphia-based A&M Berk Tax Service and reporting Q3 EPS of $0.28, higher than the $0.18 last year and the analysts' expectations of $0.25... Culligan Water Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CUL)") else Response.Write("(NYSE: CUL)") end if %> spilled $2 7/8 to finish at $55 after KX Industries and Koslow Technologies filed an amended complaint with the U.S. District Court of Delaware against the water purification and treatment products maker and its subsidiary Plymouth Products. The two plaintiffs have expanded on an earlier complaint and are accusing Culligan of patent infringement, false advertising, and industrial espionage.
Telekomunikasi Indonesia <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TLK)") else Response.Write("(NYSE: TLK)") end if %>, Indonesia's sole provider of local fixed line and fixed wireless telecommunications services, lost $7/16 to $6 7/16 in active trading following yesterday's killing of six student protesters in that country, which raised concerns of increased political and economic instability in Southeast Asia. Indonesian shares dropped 7% today, and the rupiah fell 15% to the U.S. dollar in late Asian trading. Perusahaan PT Indonesian Satellite Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IIT)") else Response.Write("(NYSE: IIT)") end if %> also lost $13/16 to $11 15/16... Computer adapter card maker Adaptec <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADPT)") else Response.Write("(Nasdaq: ADPT)") end if %> dipped $7/8 to $17 15/16 after it was countersued by Prassi Software USA, which the company originally sued for copyright infringement and misappropriation of trade secrets.
Internet commerce technology and services company Cybercash <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYCH)") else Response.Write("(Nasdaq: CYCH)") end if %> shed another $1 15/32 to $17 3/4 in the wake of reporting a wider-than-expected Q1 loss of $0.55 a share... Commercial hygiene services franchisor Swisher International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SWSH)") else Response.Write("(Nasdaq: SWSH)") end if %> plummeted $5 5/8 to $2 1/2 after announcing plans to appeal its delisting by Nasdaq. The company was delisted due to a delay in filing its 10-K last year, which it blamed on the resignation of auditors, who have since been replaced... New York Times <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NYT)") else Response.Write("(NYSE: NYT)") end if %> slipped $1 1/8 to $70 15/16 after announcing that the Sulzberger family sold about 1 million shares (1% of outstanding shares) of the company for "general financial and estate planning purposes."
Earnings Movers
Hain Food Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HAIN)") else Response.Write("(Nasdaq: HAIN)") end if %> down $1 3/32 to $20 31/32; Q3 EPS: $0.11 vs. breakeven; Estimate: $0.13
VDI Media <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VDIM)") else Response.Write("(Nasdaq: VDIM)") end if %> down $2 to $15 5/8; Q1 EPS: $0.12 versus $0.09 (before charges); Estimate: $0.13
FOOL
ON THE HILL
An Investment Opinion
by
Louis Corrigan
Oakley vs. Nike
Sometimes the investment world is so kooky, you just have to guffaw. In the past few weeks, Oakley Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OO)") else Response.Write("(NYSE: OO)") end if %>, a manufacturer and marketer of pricey sunglasses, has seen its moribund shares wake up partly on expectations of the firm's entry into the sports shoe market. Yup, that's right, the very same business dominated by Nike <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NKE)") else Response.Write("(NYSE: NKE)") end if %> but currently experiencing dark days due to the so-called "brown shoe" craze.
Even after rallying from its single-digit lows, Oakley at $13 1/4 is only slightly above its August 1995 IPO price. The proverbial roller-coaster ride over the past three years has taken the company from growth darling to has-been. The market for cool shades heated up and then burned out, leaving its major customer Sunglass Hut <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAYS)") else Response.Write("(Nasdaq: RAYS)") end if %> -- an equally disastrous investment -- up to its eyeballs in unsold merchandise. Oakley's revenues fell 11% to $194 million last year from $219 million in FY96. Gross margins sank from 69% to 61% of revenues as cost of goods sold rose in actual dollars despite a 16% reduction in unit sales. Much heavier sales, general, and administrative (SG&A) expenses also helped cut operating margins in half to 17%, leading to net margins of just 10% versus 21% in FY96. Earnings per share plunged from $0.64 to $0.28.
Nonetheless, even during a terrible year, Oakley delivered double-digit profit margins. There's little doubt that between its well-designed and technologically advanced eyeglasses and its group of prominent athlete-endorsers (including board member and Chicago Bull Michael Jordan), Oakley has created a solid brand based on superior performance. First quarter results reported April 22 also showed that business is picking up.
Sales rose 19% for the quarter to $41 million on the strength of a 37% jump in domestic revenues to $24 million. Most of that was due to pumped up orders from Sunglass Hut, which now seems to be back on track. Sales to other domestic retail outlets rose 8%. These revenue gains helped net income vault 138% to $1.3 million, or $0.02 per share versus a penny per share in the year-ago period. Oakley is now in the middle of the strong summer selling season, and the analysts still covering it appear optimistic about the full year. First Call consensus estimates project 25% earnings per share growth this year to $0.35 and a 23% increase next year to $0.43.
Still, the stock trades at 46 times trailing twelve-month earnings and 38 times projected FY98 earnings despite an industry growth rate in the low teens. Looking at other metrics, Oakley is valued at 4.8 times its sales and 7 times book. So the current price looks rich unless Oakley can deliver significant upside surprises going forward.
Yet the rabbit that founder and chairperson Jim Jannard pulled out of his hat yesterday was... an all-purpose sports shoe. At this point, it's literally a shoe rather than a line of shoes, though the company expects to have three color variations by June when the product hits 200 specialty retailers, mostly sporting goods stores that already sell Oakley's shades. The marquee model features a shell with strands of yellow Kevlar interwoven with black strands of the company's trademarked O Matter (whatever that is). The sole is an all-synthetic material modeled on motorcycle racing tires.
Of course, to get a real feel for this revolutionary product, you should check out Jannard's rhapsodic press release: "The sculpted design is a pure fusion of form and function, and many of the materials have never before been used in footwear.... Oakley discarded the antiquated academics of vulcanized rubber, with the proprietary innovation of pure Unobtainium(R) combined with Kevlar micro filaments to form a flexible gridiron designed for maximum traction and transient response."
Clearly, it helps to be a wordsmith if you're going to charge $125 for a sports shoe in the current environment -- or try to justify the $6 million that Oakley has spent developing the product. That may not sound like much, but the company has just $2.5 million in cash versus $21 million in debt. As for marketing, Jannard has signed up some youthful (and cheap) stars of extreme sports such as surfing and wake boarding. He also hopes to get some mileage out of the fact that this high-tech shoe is made on computer-controlled production lines in California, supposedly for around the same $25 per pair that it costs Nike to manufacture shoes in what some would call its overseas sweatshops. In other words, Oakley will try to win the shoe wars pretty much on buzz alone. Even assuming this were possible (and I wouldn't), does this move make good business sense?
Currently, the sports/casual shoe market is slumping. Nike's overall sales rose 42% in FY97 ended last May, but total sales for the first nine months of FY98 were up an airless 6.4%. Footwear revenue actually dropped 16% in the third quarter. The company expects gross profits to plunge $100 million this year due to closeouts and price reductions. Nike will also take a $125 million to $175 million restructuring charge in the fourth quarter. Of course, smaller players such as Vans Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VANS)") else Response.Write("(Nasdaq: VANS)") end if %> have been doing pretty well, with sales up 36% in FY97 and 18% in the first nine months of FY98. Vans probably offers a more apt comparison for Oakley since this shoe marketer's growing sales have followed the buzz generated among extreme sports enthusiasts and the alternative teen crowd.
Since both Vans and Nike sell clothing as well as shoes, neither provides a completely clean comparison. Even so, they suggest the kind of money being made in the competitive shoe market. Nike's operating margins have run around 15% in recent years, though they've slumped from 16.1% in the first nine months of FY97 to 11.6% so far this year. Vans' operating margins for the first nine months of FY98 were around 9.1%, in line with the year-ago period, though full FY97 margins ended up at just 8.7%. So operating margins of 9% to 16% are about the best that actual sports shoe marketers are delivering. Yet, even during Oakley's disastrous 1997, the company delivered 17% operating margins. That was down from the 33.8% margins recorded in 1996. So diversifying from sunglasses to shoes looks like a pretty dopey decision.
An interesting article in the latest Newsweek explains it as basically just the latest stage in an ongoing grudge match between Jannard and Nike CEO Phil Knight. Once close friends who discussed merging their companies, they split when Nike started making its own sunglasses. Court battles ensued. Jannard now seems engaged in an ego-driven attempt to embarrass Knight, if he can, with a high-tech, made-in-the-U.S.A. shoe. Newsweek provided quotes from various industry observers who seem to think Jannard is nuts. "They're delusional," said Bob Carr, an editor at Sporting Goods Business. "This is one of the most bizarre vendettas." Just For Feet <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FEET)") else Response.Write("(Nasdaq: FEET)") end if %> CEO Harold Ruttenberg said, "We don't believe there is any credence to [Oakley's] product."
Jannard's own comments to Newsweek only buttress this impression. "We don't need to sell 2 trillion shoes," he said. "I love them. And if I don't sell a pair, I'm happy as a clam."
Jannard's chutzpah is appealing. If this quixotic venture succeeds, he also could accomplish a lot for economic nationalists tired of seeing manufacturing jobs shipped overseas. Even so, one might ordinarily suggest it's time for a boardroom coup. However, Jannard holds 54% of Oakley's shares, meaning he can pretty much do what he wants with the company. More interesting, he's repeatedly said Oakley's stock is undervalued and has backed up his bluster with cold hard cash. He's bought over 2.3 million shares on the open market in the last year, paying as much as $12 1/8 per share as recently as March 20.
Maybe Jannard just has more money than he knows what to do with. Or maybe he sees such a massive turnaround afoot in the shades business that he figures Oakley can subsidize a money-losing shoe skirmish, especially if it can generate some high-profile media attention. Otherwise, this just seems like one big Kevlar-coated joke... on Jannard's fellow shareowners.
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
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