L.A. Gear sinks as show fashions return to basics.

L.A. Gear sinks as shoe fashions return to basics

Like a basketball player slipping after a slam dunk, L.A. Gear Inc., the Marina del Rey-based sneaker manufacturer, is going down hard on Wall Street after a spectacular score.

L.A. Gear stumbled to below $14 a share last week, off 73 percent from its 52-week high of $50.37, as investor fears -- heightened by a management that grants no interviews to reporters or analysts -- grow about the company's advertising budget, sales, inventories and profits.

"L.A. Gear was one stock going down even before the Iraq crisis," said Stanley Lanzet, former Drexel Burnham Lambert analyst now with Arnhold and S. Bleichroeder, a New York-based securities firm. "Nike is the hot brand right now."

It was fashion tastes that made L.A. Gear the nation's third-largest sneaker maker in a few short years in the late 1980s, and now fickle fashion may be turning on the 11-year-old manufacturer, said some analysts and short-traders (investors who bet a stock will go down).

"There is a general trend in the sneaker industry to back-to-the-basics," said Joe Feshbach, a general partner of Palo Alto-based Feshbach Bros., a well-known short-trading outfit. "L.A. Gear may have a few hot models, but the whole line may be out of step with teen-age girls."

L.A. Gear profits have been sagging: The company had a net of $10.3 million, or 51 cents a share, on revenues of $225.4 million in the second quarter, compared with a net of $16.1 million, or 91 cents a share, on revenues of $169.6 million in the year-earlier period.

Shearson Lehman Hutton, the New York-based brokerage house, recently reduced estimated 1990 earnings for L.A. Gear to $3 a share from $3.30. The shoemaker earned $3.01 a share last year, meaning 1990 may the first year the company ever reports a decrease in profits.

The comments of short-traders and others are going unanswered on Wall Street and elsewhere. Following a rash of filings in June of shareholder class-action lawsuits against L.A. Gear officers and directors, company officials have been advised to stonewall press and even analysts with stock brokerage houses. Basically, the suits contend L.A. Gear officers deluded investors into believing the company's short-term outlook was better than it turned out.

"They (L.A. Gear management) have been advised by counsel not to talk," said Lloyd Grief, managing director in the Los Angeles offices of investment banker Sutro & Co., which brought L.A. Gear public in 1986. "They haven't talked to even our analyst since the suits were filed." L.A. Gear cancelled an early August meeting with analysts.

The invisible L.A. Gear management team is spooking the market: "Because our information is becoming dated and significantly more limited, we do not expect to be able to provide accurate advice on these shares at the current time. We have no desire to bottom fish at current levels," wrote Sutro analyst Jonathan Ziegler in a recent report.

The gathering gloom for L.A. Gear investors follows years of near-unparalleled success. Even in the bull market of the 1980s, few stocks scored for investors as well as L.A. Gear.

The start-up company posted sales of $617.1 million in 1989, up from $10.7 million in 1985, while profits jumped to $55.1 million from $333,000.

Adjusting for splits, the stock rose from $1.85 in the 1988's first quarter to a high of $45.75 in the fourth quarter of 1989, a 25-fold increase.

The stock made investors and management wealthy, including the camera-shy Robert Greenberg, founder, president and chairman of L.A. Gear, who once cancelled a scheduled interview with this paper when he learned a photographer would be in attendance.

L.A. Gear, which makes its shoes in South Korea, has become famous for hiring big-gun celebrities to tout shoes; among current spokesman are singer Michael Jackson, ex-basketball star Kareem Abdul-Jabbar, and San Francisco 49ers quarterback Joe Montana.

Greenberg knows how to hire stars, and how to dodge photographers, and he also knows how to sell stock, sniped short-traders last week: Greenberg sold 100,300 shares of L.A. Gear from July 3 through July 6 for $2.91 million, or an average of $29 a share, more than double the current market price.

Greenberg still controls 3.54 million shares, with a total market value of about $48.6 million last week.

Short-traders said last week that the company's latest quarterly financial statements hint at what could be long-term ills for L.A. Gear. The company's cost of sales increased to 65.2 percent of sales in the second quarter, compared with 56.9 percent in the year-earlier period, despite an increase in sales. Second-quarter net earnings slid to 4.5 percent of sales, compared with 9.5 percent in the year-earlier period.

Inventories bulged to $183.6 million on May 31 from $139.5 million on Nov. 30, 1989. Short traders said the inventory bulge is a sign of slow sales. Company literature said the big inventory is on hand to accommodate retailers who wish to restock on short notice.

Following the second quarter, L.A. Gear revealed it was selling shoes at lower margins in a battle to keep shelf space at the retail level.

Supporters of the company said that unusual start-up costs, connected with shoes that are being touted by football player Montana and entertainer Jackson, are sacking profits, but only for the short-term.

"This company is introducing many new lines, such as the Michael Jackson line, and a new line of cross-hiking shoes for women," said Donald Wampach, analyst with Hamilton Investment Inc. in Chicago. "And they are spending to make inroads in the European and Japanese markets."

With L.A. Gear stock down, it makes a good long-term buy, said Wampach.

Investment banker Grief also sang the company's praises last week, noting the founder Greenberg, and the company Executive Vice President Sandy Saemann, had built a major manufacturer from scratch.

But New York analyst Lanzet said that the sneaker industry has become mature and cut-throat, and the battle for shelf space and market share will intensify in the 1990s. L.A. Gear's profit squeeze could be long-term.

"The sneaker business is maturing, but you have all these competitors, such as K-Swiss (a Pacoima-based company), Converse, Nike and L.A. Gear that want to grow at double-digits," he said. "The battle of the 1990s will be to keep market share, and that will mean manufacturers cutting margins or spending on promotions to win retailers and customers. It will be hard to show big profit jumps."

Investors must be leery of L.A. Gear's future; at last week's prices, the stock is trading for a meager price-earnings ratio of 4.6, well below the price-earnings ratio of the overall stock market or of competitors. (A price-earnings ratio is the price of a company's stock divided by earnings per share. A $10 stock with $2 per share in earnings has a price-earnings ratio of 5.)

For such a large company, L.A. Gear has a noticeably small board of directors, dominated by management. The five-man board includes Greenberg; Saemann; Gil Schwartzberg, executive vice president and chief administrative officer; Allan Dahlshaug, chairman, chief executive, and president of the small, Mid-Wilshire-based Sterling Bancorporation; and Richard Schubert, partner in the Beverly Hills-based Cooper, Epstein & Hurewitz.

PHOTO : L.A. Gear has become famous for hiring celebrities to tout its merchandise. Current

PHOTO : spokesmen include singer Michael Jackson, above, and 49ers quarterback Joe Montana