Still Treading Water at Reebok

Sure, the stock's looking cheap, but it's going to be hard for the company to make inroads without defining its message more clearly.
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It was a humbling moment for Paul Fireman, president, chief executive and largest individual shareholder of

Reebok International

(RBK)

.

A decade earlier, Reebok had captured a lead in the fitness craze with its popular aerobic sneakers, but by the mid-'90s, the company was losing market share to rival

Nike

(NKE) - Get Report

. At the company's 1996 annual meeting, Fireman, who owns about 14% of Reebok, promised to either turn the company around in two years or resign.

Today, more than three years later, Reebok's sales and earnings continue to deteriorate. And Fireman? "Mr. Fireman has no intention of resigning," says company spokeswoman Nancy Moss.

Down at the Heels
Reebok shares' five-year bath

Source: BigCharts

Investors, meanwhile, seem willing to reward Reebok for even the smallest steps. On Oct. 21, the company reported third-quarter earnings of 49 cents a share, which beat Wall Street estimates by a penny. (Earnings excluded a restructuring charge of 43 cents a share.) The stock jumped 19% to 10 9/16 after the announcement, although shares have since settled to 9 9/16 as of Thursday's close.

What investors chose to ignore in that earnings report was that futures -- orders scheduled for delivery from Oct. 1 through March 31 -- would be down by as much as 17% from year-ago levels. That information caused analysts to trim their earnings estimates for the fourth quarter to a loss of 2 cents a share from a profit of 8 cents a share.

"Reebok keeps talking about what's beyond the horizon," says John Horan, publisher of

Sporting Goods Intelligence

, a trade magazine. But none of those efforts has "shown up in their backlog numbers yet."

The quarter underscores just how difficult it will be for Reebok to regain its footing. Although the company has made some of the right moves by cutting costs, developing successful new products and rethinking its marketing, the nature of the athletic industry makes it a near-Herculean task for an underdog to gain market share. With the industry stagnant, any sales that one company picks up come at another's expense.

Consider that in the early '90s, Reebok and Nike each had roughly $3 billion in sales. By 1998, Reebok's sales had barely budged to $3.3 billion, while Nike's sales had nearly tripled to $8.8 billion. Meanwhile, Reebok's earnings, which peaked at $3.02 per share in 1994, have collapsed to an estimated 87 cents per share for the current year.

Adding to Reebok's competitive woes is the recent success of niche players such as privately held

New Balance

and

Saucony

. "The argument in favor of Reebok for a long time was that retailers needed some alternative to Nike," says Fay Landes, an analyst with

Thomas Weisel Partners

, who rates Reebok a market perform. (Her firm hasn't performed underwriting services for Reebok.) "Today, there are a lot of other players."

How Reebok lost the sneaker wars has become a sort of folklore that Fireman likes to retell during

mea culpa

speeches he's prone to giving at investment conferences. Landes sums it up: "They got distracted."

In addition to the namesake Reebok division, whose U.S. operations accounted for 44% of the company's sales last year, there is the

Greg Norman

label, which markets golf and casual clothes and accessories, as well as shoe subsidiaries

Rockport

and

Ralph Lauren Footwear

.

Reebok's troubles "go back to a fuzzily defined brand," Landes says. "When you ask different people at Reebok what the brand stands for, you get different answers."

Carl Yankowski, president of the Reebok brand, says it stands for "innovation and style, and participation and the fun and enjoyment of sport. We bridge the gap between lifestyle and women and sports. It's a broad definition, but the core heritage of this brand is around fitness ... and participation. Participation and fitness and women ... not excluding men."

Until that question can be answered more succinctly, it's unclear how much Reebok will benefit from a brand-repositioning strategy scheduled to begin next year, when the company plows some of the cost savings that were part of the recent restructuring charge into marketing. Along with the new marketing effort will be the rollout of some new products. (See related

story.)

But the real challenge for a company like Reebok is getting new products displayed on valuable retail wall space. To ensure placement, manufacturers often provide "sweeteners" that can include co-op advertising and more lenient payment terms. Then there are special performance incentive funds, whereby manufacturers pay store clerks $5 for every pair of shoes they sell.

"Reebok is buying wall space," contends John Shanley, an analyst with

First Security Van Kasper

, who rates Reebok a neutral. (His firm hasn't performed underwriting for the company.) "When you've been down and out for two years, to get back on that shoe wall, you've got to do some handsprings." And that's one reason why Reebok's margins on earnings before taxes, interest, depreciation and amortization are about half those of Nike.

Yankowski admits that sweeteners are a common practice in the industry, although he declines to talk specifically about Reebok's incentive plan. He adds that comparing Reebok and Nike margins is like comparing apples to oranges, because the companies have different divisions. For instance, Reebok is more focused on casual footwear and apparel, and Nike makes sports equipment, a business that Reebok has not entered.

Nike's strength for the past few years has been the leverage it wields with retailers, says Landes, the Weisel analyst. Because of the brand's popularity, Nike can call the shots. Reebok, meanwhile, is left playing catch-up.