Short-sellers stand corrected as sales jump at L.A. Gear.

Short-sellers stand corrected as sales jump at L.A. Gear

L.A. Gear, the red-hot Los Angeles-based footwear maker, triumphantly announced last week it has smote the short-traders that once bedeviled its stock.

"Short-sellers always pick on stock in our (the apparel) industry, because it is a volatile industry," said Elliot Horowitz, L.A. Gear chief financial officer. "I guess this time it didn't work out for the shorts."

Since sinking to $9 a share early this year, L.A. Gear stock has boomed, trading for more than $27 a share last week.

At a company annual meeting held last Monday, Horowitz said he expects L.A. Gear fiscal 1988 sales to reach as high as $210 million, nearly triple 1987 sales of $70.6 million.

L.A. Gear can expect in 1988 a profit equal to about 8 percent of sales, or about $16.8 million in the best-case scenario, said Horowitz. That would be nearly four times the 1987 net income level of $4.4 million.

Horowitz's lower-end projections for 1988 sales and net were $140 million and $11.2 million, still well up from 1987.

Long in advance of Horowitz's official announcement last week, the stock of L.A. Gear had been soaring. L.A. Gear stock traded in the single-digit range in the months following the Oct. 19 stock market crash -- when short traders thought the company was overvalued -- but was trading at $27 a share last week even before Horowitz' glowing assessment.

The chief financial officer said short traders have been forced to cover their positions, resulting in a steady demand for the stock in the last two months.

(Short traders are speculators who believe a stock is going to go down in value. Short traders borrow stock for delivery at a future date at a fixed price -- the "short sale" date. If the stock declines in value, the short trader buys the stock at a lower prevailing market price and delivers it at the higher, fixed price, making a profit. If the stock rises in value, the short trader loses. In any event, short traders have to buy stock to cover their positions at time of delivery, generating demand for the stock.)

"You know, there was such a huge short position in our stock -- 547,000 shares -- and such a small float (small number of shares traded on the market) that the price was bound to go up," said Horowitz.

As roughly 48 percent of L.A. Gear stock is held by corporate officials and other insiders, little more than 2 million of L.A. Gear's 4 million shares are available for trading, noted Horowitz.

"That's a thin float...I imagine the short traders have been bidding the price up just covering their positions," said Horowitz.

He also said that L.A. Gear has a $75 million backlog of orders, compared to a $13 million backlog at the same time last year and a $53 million backlog one quarter ago.

In other presentations at the annual meeting, Robert Greenberg, chairman and president of L.A. Gear, proclaimed "The shoe business is a lot like show business."

Among other show business-like promotional efforts, L.A. Gear has constructed a 7,000-square-foot sales booth featuring replicas of landmark structures of Los Angeles, such as City Hall, the Santa Monica Pier, the Hollywood sign and the Eastern Columbia building. The $500,000 booth, replete with bikini-clad California girls dancing in L.A. Gear sneakers, has been a big hit in trade shows.

"Sales just went crazy after that booth was shown in Atlanta and New York," said Frank Podbelsek, securities analyst with Wedbush Securities in downtown Los Angeles. "It generated a lot of excitement in retailing circles and on the stock market."

L.A. Gear, which went public in July 1986, should earn between $2.75 and $3 a share in fiscal 1988, said Podbelsek, who touted the stock prior to its price surge. In 1987 L.A. Gear earned $1.08 a share. Podbelsek noted L.A. Gear carries no long-term debt.

At $27 a share, Podbelsek said he still recommends the stock for "aggressive" investors."

To further move its shoes, L.A. Gear has also hired Los Angeles Laker professional basketball player Mychal Thompson and Los Angeles Rams professional football player-turned Olympian Ron Brown to tout their shoes this summer, revealed Sandy Saemann, L.A. Gear executive vice president in charge of promotion.

L.A. Gear has made its mark in retailing circles by selling fashionable sneakers to girls and women, not boys and men, the usual buyers of sport shoes. The company now plans to market more heavily to boys and men, to which end the sports stars will be put.

L.A. Gear orders shoes from 20 factories in South Korea and Taiwan, said Greenberg, and the company anticipates no problems in the production or delivery of its shoes, despite its huge orders. "The factories we use make for everybody, for (competitors) Reebok and Nike. They have unlimited capacity," said Greenberg.

L.A. Gear officials said they would soon begin a program to educate large institutional investors on the virtues of L.A. Gear stock, which is now mostly held by individuals, and may consider a stock split to increase the float, or liquidity, of the stock.