Innovation Is Key for K2 - TheStreet

ATLANTA -- Forget about synergy. Give me symmetry. Or something like that.

In the sporting goods industry, the concept of "product innovation" seems to rule the arena. At the

Super Show's

financial day, which precedes this 100,000-person circus, it seemed that every corporate chieftain who spoke rambled on about "innovations" in new products.

The message, delivered Thursday, was stale long before the audience of financial analysts and reporters broke for a white-napkin lunch.

Yet, when John Rangel, chief financial officer of

K2 Inc.

(KTO)

, made his presentation late in the afternoon, the normally staid group edged up in their seats as he described some of the innovative products K2 has launched and the new ones it has in the pipeline.

"They are one of the most aggressive

sporting goods companies at introducing cutting-edge technology products to the market," gushes Gary Jacobsen, an analyst with

Jefferies & Co.

, who initiated coverage of the stock with a buy rating in November.

The company's strategy has turned out to be savvy. While the sporting goods industry has been growing at about 6% annually, the premium segments -- where innovation is vital -- have been growing much more rapidly, according to the

Sporting Goods Manufacturers Association

. The trend is that enthusiasts will fork over top dollar for sports equipment or gear that delivers high performance. Some mountain bikes retail for prices closer to that of a Hyundai than the Schwinn of childhood memory.

K2 delivers innovation across a broad range of sporting goods, including mountain bikes, skis, snowboards, fishing poles and tackle, in-line skates and sports apparel. It also has a thriving business selling less-than-glamorous industrial products.

Last year, the company helped rejuvenate the stagnant alpine ski industry with its midseason introduction of a shaped ski, which makes turning easier, called the K2 4. In its first full season this year, the K2 4 has become the top-selling ski in the country. The latest K2 skiing innovation is the Merlin 5, which has been heralded as the first ski with a "brain" because of internal electronic circuitry that diffuses vibrations and allows for a smoother ride.

In an industry where sales have been flat, these premium products have allowed K2 to increase its dollar market share from 21% to 24% even as unit sales were unchanged, according to the

Ski Industry of America

.

When K2 entered the in-line skating market in 1994, it also did that on its own terms with a revolutionary, patented soft-boot skate.

"We live or die by innovation," Rangel told

The Street

in an interview. "It doesn't make sense for us to put the K2 name on a me-too product."

While some competitors like privately held

Rollerblade

and

First Team Sports'

(FTSP)

Ultra Wheels have since introduced imitations, they have not been able to copy the soft shoe being molded directly onto the skates' wheels.

Tim Conder, an analyst with

A.G. Edwards

, says the company's latest line of soft-boot skates has experienced preseason orders that are up 100% domestically and more than 200% in Europe. Conder has the stock rated a buy.

Meanwhile, when the company finds a hot, growth market that it can't efficiently enter through internal production, it will go out and make acquisitions. In 1993, as full-suspension mountain bikes became popular in the suburbs, K2 bought the Pro-Flex line from

Ocean State International

. Over the past 10 years, the company has made seven key acquisitions in the sporting goods industry.

"Management has proven its ability to acquire small niche companies and rapidly grow them," says Jacobsen.

Based on growth of K2's markets and tight control of manufacturing, Jacobsen believes that the company's stock is cheap. He sees K2 trading at a "fair value" P/E equal to the 20% earnings-per-share growth he projects for 1997, which would mean a share price in the high 30s. The stock closed Friday at 27 5/8, down 1/8.

By Avi Stieglitz

astieglitz@thestreet.com