Skechers Runs the Wrong Way

As teens' puppy love with the brand fades, so does investors'.
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Is

Skechers

(SKX) - Get Report

, the latest sneaker company to burn rubber, heading for burnout?

Since selling shares to the public for the first time in June at $11 each, Skechers stock has skidded about 35%. Tuesday it changed hands around 7 3/16 a share.

A Slide for Skechers
After leaving the starting gate, the stock has recently sunk below 10.

That's no surprise to one hedge fund manager who best remembers the father-and-son team that runs Skechers from their stewardship of

L.A. Gear

, another highflying sneaker company that eventually deflated. The hedge fund manager met with Skechers' Chairman and Chief Executive Robert Greenberg (the father) and President Michael Greenberg (the son), before the IPO.

"The son couldn't answer one question. I must've asked him 30, and he deferred them all to his father, while he sat there picking at his tie looking like he was bored," the hedgie says.

Skechers declined to comment for this story.

Some of the stock's decline came last week even as both underwriters,

Deutsche Banc Alex. Brown

and

Prudential Securities

, initiated coverage with buy and strong buy ratings, respectively.

That's when it's time to read the fine print.

The first giveaway was in the company's prospectus, which warned that backlog -- orders placed by retailers for future delivery -- was down 16% to $136.5 million year over year for the period ended March 31.

In a research note, Deutsche Banc's Marcia Aaron warned that the backlog will likely decline by a similar or greater rate when Skechers reports second-quarter results next month. And she noted that sales for the quarter will come in several million dollars below her forecast, although she expects the company to meet her earnings estimate of 18 cents a share, because margins will be higher than anticipated.

Aaron declined to comment for this story, but in her note, she said the shrinking backlog is a result of an industrywide practice of moving product from factories to stores at a quicker pace. As for the lower revenue, Aaron wrote, Skechers was delayed in shipping large orders at the second quarter's end, and therefore, that revenue will show up in the third quarter.

Nevertheless, other analysts and money managers who track the shoe industry say there may be different explanations for the sliding backlog and revenue.

While lead times are tightening at

Nike

(NKE) - Get Report

and other large companies that specialize in technical products, "lead times for fashion companies have always been short," says one analyst who follows the industry but doesn't follow Skechers and declined to be named. Lead times have to be short for a company to compete in the world of teen fashion, where new trends come and go faster than you can say "cargo pants." Skechers, with its chunky-soled shoes, is mainly a fashion brand.

And, this person says, the revenue shortfall may be a sign of saturation in one of Skechers main businesses, the white sneaker. "Retailers are telling me that sales of the basic white sneaker is slowing down," the analyst says. "There is a redundancy."

Skechers is the latest vehicle for Robert Greenberg, whose ability to wrap an era's pulse points into a neat marketing package worth millions is almost legendary.

The elder Greenberg's most recent triumph was L.A. Gear, a sneaker company he founded in 1979 that marketed the cotton candy, Valley Girl look of the West Coast in the '80s. At one time, L.A. Gear had $600 million in sales and had the decade's icons like

Michael Jackson

pitching its sneakers.

As pastels and aerobics went out and grunge and extreme skiing came in, L.A. Gear lost its footing. A host of other suspect developments, ranging from alleged underpayment of customs duties to shareholder lawsuits, dogged the company and left a sour taste with investors that has yet to dissipate.

Both Greenbergs resigned from L.A. Gear in 1992. Later that year, the company pleaded guilty to

U.S. Customs Service

criminal charges and at the same time paid $1.3 million to settle civil claims. Two years after that, L.A. Gear paid some $53 million to settle a series of shareholder class-action suits. Last year, amid sagging sales, L.A. Gear received approval to reorganize its business under U.S. bankruptcy protection, from which it has since emerged.

Upon leaving L.A. Gear, the Greenbergs founded Skechers as a distributor of

Dr. Martens

footwear. The company soon began designing shoes under its namesake label, which rode into malls on their thick-heeled soles and became favorites with the young and restless.

In their zeal to build Skechers, the Greenbergs may have marketed the brand too fast too soon, say five people who track the industry. At the end of 1998, Skechers made 900 different styles of shoes, up from 600 a year earlier, which are sold through department stores like

Nordstrom

(JWN) - Get Report

, athletic specialty stores like

Foot Locker

, owned by

Venator Group

(Z) - Get Report

, and teenage apparel retailers like

Pacific Sunwear

(PSUN)

.

Furthermore, the company's advertising as a percentage of sales in the three months ended March 31 was higher than intended, according to documents filed with the

Securities and Exchange Commission

.

"There's no question that availability to the masses dilutes the prestige of a brand," says Candice Corlett, a partner in

WSL Marketing

, which hasn't consulted for Skechers.

True, most companies must eventually sacrifice a degree of prestige for sales volume, Corlett continues. But brands that are nurtured slowly and allowed to slip naturally into the vocabulary of their target audience have a better shot of staying cool longer. She points to

Steve Madden

(SHOO) - Get Report

, whose shoes developed an aura on the fringes for years before broadening to mainstream retail outlets.

"It's doubtful that Skechers will ever reach the pinnacle of prestige that Madden is seeing," she says. Skechers "is going for it too fast."