Shoe stock comes unlaced Fila had soared with Grant Hill line

December 22, 1996|By Timothy J. Mullaney | Timothy J. Mullaney,SUN STAFF

Everyone from physicists to blues singers teaches kids that what goes up must come down. But lately the stock market is teaching that harsh lesson to Fila Holding SpA.

Fila has been one of the market's highest nontechnology fliers, and one of Maryland's unqualified business success stories. Sales went from $188 million to $1.3 billion in five years, and one who bought 1,400 shares of Fila in 1994 at $15 could pay cash for the average Baltimore-area house with the profits by September, when Fila reached $106.88.

But Monday, just three months later, Fila shares were back to $58. In the sneaker business, image is everything, and the buzz has turned on Fila. Hard.

After two years in which analysts flocked to the stock, defending its sky-high price with visions of uninterrupted growth, Fila finds itself looking up at the overall stock market, at industry leader Nike Inc. -- and even at shares of oft-derided rival Reebok International Ltd., a company Wall Street thinks is finally getting its act together. And Fila hates it.

"I don't understand how you could be recommending Reebok [stock] at a higher multiple than ours unless you worked there," Fila USA General Manager Robert W. Liewald complains.

But it's happening. And there there are a lot of reasons why.

Fila pins much of the blame on short sellers, on the arrival of more skeptical footwear analysts at a pair of Wall Street firms, and on announcements that fashion companies like Ralph Lauren, Tommy Hilfiger and Donna Karan are pushing into the sneaker business, threatening to chip away at Nike, Reebok, and particularly Fila.

But closer to the bottom line is slow retail sales of the latest Fila shoe endorsed by Detroit Pistons forward Grant Hill. Hill's first shoe sold 1.5 million pairs last year, a performance Fila says made it the biggest new sneaker since the first Air Jordan. The second edition of the Hill sold even more. But the new edition, Fila's first $100 sneaker, is being marked down to $80.

High-flying stocks are always vulnerable to bad news, especially when they're driven as much by a key product as is Fila. When the Hill sneezes, Fila catches cold.

"Markets always bid up stocks that show strong growth rates," said John Horan, editor of the newsletter Sporting Goods Intelligence. "All you need is one little tiny mistake to see the market overreact in the other direction."

Fila hasn't had much opportunity to learn how to accept criticism gracefully. There hasn't been much criticism for the Italian firm, which has U.S. headquarters in Hunt Valley.

Fila labored in near-obscurity through the late 1980s. A licensee controlled the footwear brand in the United States, and hadn't done much with it. But Fila bought out the licensee in 1991, and things took off from there.

Fila had a tiny piece of the 1991 market, but a key edge: it was closely identified with the trend-setting inner-city consumer. As black style went hip-hop, and hip-hop went mainstream, Fila rode the waves skillfully.

By 1993, when Fila went public, it wanted to break into suburban markets ruled by Nike and Reebok. Executives also wanted to make people think of Fila as a shoe to wear to work out, rather than just a fashion item. They saw athletic acceptance as the way to make sure Fila didn't go the way of L. A. Gear, a hot 1980s brand that collapsed when the fashion trends that made it big faded.

So Fila began signing big-name U.S. athletes to endorsement deals. Endorsements sell shoes and build an athletic image, but each endorsed pair is also more profitable than the same shoe without an endorsement because the extra markup more than covers the athlete's fees. In 1994, Fila outdueled Nike for the blessing of Grant Hill.

The first Hill shoe became a staple at suburban YMCAs as well as on city buses, winning Fila previously unavailable amounts of prime display space from chains such as FootLocker. Other winning ideas followed.

"The key driver of Fila's growth has been its ability to create excellent product," Salomon Inc. analyst Brett Barakett wrote earlier this month. "More so than at any other company, the product creation group at Fila is superior to all other departments."

Fila's profits went just about nuts. The company's U.S. market share doubled between 1993 and 1995 and it moved to third place last year from sixth in 1993 in U.S. wholesale athletic-shoe sales, according to Sporting Goods Intelligence. International shoe business also grew fast, and promising clothing lines blossomed.

Even as Fila beat Wall Street's earnings expectations every quarter, the forward-looking news was usually even better. When Fila announces its quarterly results, it also discloses information about its orders for the next quarter or two -- and those reinforced the good news by showing sales rising 30 percent to 50 percent or more in the future as well.

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