Fleet-footed Fila flies Earnings: Once again Fila, the athletic shoe and apparel maker, defied analysts' more modest predictions, posting earnings that rose 127 percent in the second quarter.

August 05, 1996|By Timothy J. Mullaney | Timothy J. Mullaney,SUN STAFF

Fila Holding S.p.A. stock fairly jumped last week out of the muck that has dragged down growth-company stocks, staging a huge rally that began before the sneaker and clothing company reported second-quarter earnings Thursday that for the 10th quarter in a row smashed analysts' estimates.

After a six-week beating that took $25 off the price of its stock, Fila bounced back $14.25 in a day and a half.

The rebound was spurred by the company announcing that its profits had soared 127 percent to $25.9 million, or 98 cents per American depositary share.

The spectacular recovery left previous estimates of 65 cents looking as flat-footed as the chunky kid in the Sprite commercial who tries to guard Fila endorser Grant Hill of the Detroit Pistons.

"They make it a habit," Gruntal & Co. analyst Susan Silverstein said. "Analysts keep raising their estimates and [Fila] keeps beating them."

The Italian company, whose U.S. headquarters is in Hunt Valley, followed up by telling analysts that it has signed Ray Allen of the University of Connecticut, the fifth pick in June's NBA draft, to a five-year endorsement deal that heralds another star-driven line of clothes and shoes.

"He sensed the excitement; all you have to do is look at the [company's] pie charts," said Lee Fentress, Allen's agent and head of the McLean, Va.-based firm that also represents Hill and Philadelphia 76ers guard Jerry Stackhouse, Fila's big endorsement catches of the last two years.

Fentress would not disclose the terms of Allen's deal, except to say that some of it depends on royalties on products that carry Allen's name.

"It depends on how Ray plays and how Fila does," Fentress said.

Fila officials could not be reached Friday.

Before the NBA draft, they had indicated a strong interest in Georgetown guard Allen Iverson, soon to be Stackhouse's teammate in Philadelphia, but Iverson signed with Reebok.

Fila also was attracted to Ray Allen, believing the Milwaukee Buck-to-be's physical attractiveness and speed-based game make him marketable.

Patrick Snell, a Robertson, Stephens & Co. analyst, said Allen's signing is part of Fila's plan to expand to four annual fashion seasons from three, each one built around advertising campaigns featuring Hill, Stackhouse, Allen, or Dallas Mavericks forward Jamal Mashburn.

"There's no other brand, with the exception of Nike, that has so much momentum," Snell said.

But the analyst was not convinced Allen, a bona-fide college star who is not seen as as sure an NBA bet as Hill or Stackhouse, was the right choice as Fila's next big endorser.

"I don't know if it's the right guy, but that's the guy," Snell said.

The earnings brought Fila's first-half profit to $54.4 million, up from $26.8 million in the first half of 1995. Sales were $322 million for the quarter and $661 million for the first half, both figures up more than 50 percent.

And the big gains are likely to continue for the rest of the year at least, because Fila announced that orders for delivery between July and December were also up 49 percent.

The biggest gains in shoe sales are coming in cross-training shoes and basketball shoes, Fila said. U.S. cross-training shoes were up 140 percent and U.S. basketball sales rose 90 percent.

Short-term bonanza

Fila's smaller clothing business posted second-quarter sales 63 percent higher than in 1995.

The big sales gains turn into even bigger profit gains for two reasons.

First, the company's overhead other than paying contractors to make its products -- expenses like salaries and advertising -- is not growing as fast as sales.

Second, endorser-backed sneakers make up a bigger percentage of Fila's sales than in the past, and they are usually higher-priced and more profitable than the company's other models.

The profit gains provoked a short-term bonanza in Fila shares, which often are volatile because few shares are available (an Italian conglomerate owns more than half the company).

Fila shares jumped $10.625 on Thursday and rose another $8.625 to $99.875 on Friday before falling back to close at $94.75.

Everything in last week's report mirrors what Fila has been doing since it went public in 1993. The company's sales will cross $1 billion this year, up from $188 million in 1991.

The high growth rate has made Fila's stock very expensive compared to its current earnings, as analysts used expected future profits as a benchmark instead.

But such high-flying stocks were the ones that got hit hardest in the market slowdown during June and July, as skepticism mounted about corporate earnings growth in general. No analysts cut their Fila estimates during the stock's dive.

Fila had soared to an all-time high of $101 on June 10 after its first-quarter earnings report in May. But it closed at only $74.75 on July 24, as investors deserted a firm that earned just $2.42 per depositary share in 1995.

Snell says the high price is logical because he thinks Fila's profits will grow 20 percent to 25 percent annually for three to five years. He says Fila shares should move "close to 120 within 12 months."

He said the company still has less than a 10 percent share of the U.S. athletic shoe market and is nearly invisible in the running shoe market, which Fila is moving to attack.

Raising estimates

Silverstein said Fila's stock price is not very high considering that analysts are moving their estimates higher in response to being proven too conservative.

She says Fila will earn $3.95 per American depositary share this year and $4.75 next year, adding that other analysts believe Fila will earn more. Snell projects $4 per depositary share in 1996 and $5 next year.

Before Thursday's report, the average estimate of seven analysts in an I/B/E/S International Inc. survey was $3.39 per American depositary share this year and $4.10 next year.

Pub Date: 8/05/96

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