Betting on Continued Growth, Skechers Left in Inventory Bind.

This summer, when many retail footwear makers were scaling back growth plans in a weakening economy, Skechers USA Inc. raised eyebrows by gearing up for further sales gains.

And why not? Its sales rose 59 percent in 2000, and were on track to post an additional 48 percent gain in the first three quarters of 2001.

But the gamble backfired in the aftermath of Sept. 11, as the Manhattan Beach footwear company run by former L.A. Gear founder Robert Greenberg, already targeted by short sellers, was caught overloaded with inventory for the back-to-school season.

Inventories edged up to $158.5 million in the third quarter, ended Sept. 30, though the company is expecting to cut them back to about $112 million by the start of 2002, roughly the same level at which it entered this year.

While the attacks hit the entire market, lingering concerns over its outlook have kept Skechers from rebounding along with the rest of its sector.

Local peers such as Vans Inc. and K-Swiss Inc. saw their stocks drop sharply after the attacks before stabilizing, but Skechers has continued to fall -- despite net purchases of nearly 900,000 shares made by short sellers cashing in on negative bets. (This buying would tend to support the stock price.)

On Oct. 25, after Skechers reported a decline in third quarter earnings and indicated that sales would be stagnant through the first half of next year, the stock fell another 14 percent, to $10.50. That compared with a close of $16.95 on Sept. 17, the first day trading resumed after the attacks. Five months ago, the stock traded as high as $40.30.

Chief Financial Officer David Weinberg said he has no regress about the inventory strategy.

"The goal was to make market share and gain acceptance of e brand," he said. "I don't think anything that I as happened will be devastating, and we'll clear (the inventory) out. We're a stronger company for it."

The challenge is to manage through sales that could wind up $40 million to $50 million below previous estimates over the next three quarters, without crippling the ability to continue taking market she.

"Growing at a high rate you tend to upgrade infrastructure at a much higher rate," Weinberg said. "Once you sort of grow into your skin, you go back and build efficiency. That's the point where wear right now, although we're not sure that our growth is over."

Investors wary

There was a lot of "fast money" in the stock, and when those investors exited, it may have exaggerated price swings, Weinberg said. "I'm not a big understander of all the stuff that happens in the market," he added.

Skechers has had to downshift quickly. The question isn't whether it can do so without grinding the gears -- they wail with every order cancellation. Rather, can Skechers do so without dropping its transmission on the road?

"Time will tell," said one analyst. "They're going to have to manage their business differently in the near term. It's a very tough environment for a company that's been making investments for growth to have to alter the pace."

The company's success across all product lines before Sept. 1.1 emboldened it to add staff and increase advertising commitments, and operating costs soared. As a result, net income for the third quarter was $11.4 million (30 cents a diluted share), compared with $15.3 million (40 cents) for the like period a year ago, even as sales surged 40 percent, to $287.9 million.

Since the 11th, however, Skechers has taken some aggressive actions. It cut staff by five percent, closed its mail-order business, temporarily closed online sales (the company will look for an outsourced provider), scaled back plans to open new stores next year (to between eight and 12 from the originally planned 28) and plans to reduce its advertising commitment. These measures are expected to shave operating expenses by a "conservative" $25 million next year, Weinberg said on a conference call.

Stocked up

The company's biggest challenge is getting inventory in line. Inventories have been a concern for Skechers for the past year, and have climbed even as the sales outlook faded. Weinberg said the company is working to clear out excess inventory and has cut back on "speculative" orders from manufacturers that aren't backed by firm orders from retail customers.

With sales projected to be flat for the first half of next year, Weinberg said he didn't know how long it would take for the company would reach its inventory goal, although inventories will be down significantly by yearend.

"You want to stay as flexible as you can," he said. The goal is to clean up existing inventory and prepare to operate profitably without growth, but be able to react quickly if a rebound occurs, Weinberg said.

The irony is that Skechers' growth plans were on track through July and August, as the company's trendy, reasonably priced sneakers and casual footwear remained popular in key children, teen and "tween" markets.

Skechers' outlet and warehouse stores, where the company unloads its less current fare at a discount, performed well, as did its international operations. Department store sales faltered, company officials said on their conference call, as did sales at full-price concept stores.