Converse: Back from the Bench

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By Suzanne Kapner
Staff Reporter

Despite a slowdown in retail sales that is hobbling certain superstar sneaker players,

Converse

(CVE) - Get Report

, home of the

All Star

, continues to drive the lane. (

As originally published, this story erroneously said "charge the lane.")

With its turnaround strategy humming -- including new management, brand cohesion, resolved legal troubles and a marketing deal with

NBA

hotshot

Dennis Rodman

-- Converse's stock gained 94% from Jan. 2 through Feb. 25. (

The Street

reported on Converse's turnaround in a

Feb. 13 story.)

Yet, reports of ebbing demand for athletic footwear from retailers like

Footstar

(FTS) - Get Report

stopped Converse's stock in its tracks. The All Star maker gave up its prior gains in a decline that ran from February through April. Other major players like

Nike

(NKE) - Get Report

and

Reebok

(RBK)

hit the injury list as well. The

Footwear

index of data tracker

Baseline

fell 25.6% from its high in February, compared with a 3.1% gain in the

S&P 500

index during the same period.

Even Jeffrey Vinik, of

Vinik Asset Management

, has been paring back his investment in Converse during the sector softness. From March through April Vinik reduced his stake from 1.2 million shares to 540,000, according to documents filed with the

Securities and Exchange Commission

.

But since the beginning of May, Converse's stock is accelerating again, and several analysts and money managers say the momentum will continue. Wednesday it traded at 20.

"There is a question: If Nike sneezes, will everyone get a cold?" says Faye Landes, an analyst with

Smith Barney

. "So far the slowdown seems to be Nike-specific," says Landes, whose downgrade of Nike to neutral from outperform on April 7 sent the stock reeling. The market was abuzz with concerns about the Swoosh maker's slowing production.

Landes has maintained her buy rating on Converse with a 12-month target price of 28. Her firm participated in a Converse debt offering that was completed last week.

Landes says she remains bullish because Converse continues to gain market share and, so far, has not reported a slowdown in back orders -- a key measure of a manufacturer's future sales.

Glenn Rupp, Converse's chairman and chief executive, confirmed in an interview with

The Street

that "there has been no slowdown in order activity." Rupp joined the company in April 1996 to lead its turnaround.

As of April 26, Converse reported that back orders jumped 50% to $227.9 million from $152.2 million last year. In contrast, Nike's backlog for its most recent quarter grew 34%, while Reebok's grew just 9%. Note that Nike and Reebok are posting percentages off a larger base.

Rupp says the company is building on the market share it commanded in 1996 (a figure that industry group

Sporting Goods Intelligence

put at 3%). While market-share data are only available on an annual basis, Rupp says Converse made strides during the first quarter, its first profitable one after seven consecutive quarterly losses. For the period ended March 29, the company earned $4.7 million, or 26 cents a share, excluding a one-time gain, compared with a loss of $3.3 million, or 20 cents a share, last year. Sales surged 57% to $136 million from $86.6 million a year ago.

The company cut money-losing product lines in areas like baseball and football and refocused on the stronger basketball, "athleisure," kids and cross-training categories, Rupp says. Popular products in each division, most notably the

Dr. J

basketball sneaker, renewed consumer interest.

Next in the lineup is the

All Star 91

. Named after Rodman's basketball number, the shoe will get plenty of play since Rodman is wearing it during the playoffs. Rupp says the shoe will hit stores as a national advertising campaign debuts on TV in late June.

"Converse is hot right now," says Thomas Buynak, an analyst with

Society Asset Management

, which first bought Converse shares about a year ago. While Buynak wouldn't specify how many shares his firm owns, he adds that he is not selling on the news of a softer retail environment. He is keeping an eye on that all-important backlog figure.

Investors in the debt market seem similarly bullish. Converse originally filed for a stock offering, but switched to debt when the stock market hit the skids earlier this year. Converse raised $20 million more than originally planned for a total of $80 million. Rupp says the money will be used to pay down debt that carries less favorable rates. Last year the company reduced long-term debt by 91% to $9.6 million.

And Rupp says the $13.7 million that Converse was awarded in February after winning a lawsuit against

Apex One

, an apparel company it bought in 1995 that filed for bankruptcy protection soon after, also will help extinguish debt.

As for future financing, Converse recently renewed a $150 million line of credit with

BT Commercial Corp.

Though Converse may have sat out a few quarters, with numbers like these it's still very much in the game.