Is it a mountain or just a molehill?
The North Face
(TNFI:Nasdaq) -- a leading supplier of equipment and clothing for high-altitude polar expeditions -- is facing a problem that most companies generally dream about. Their high-end products have become so popular, the company wonders if it should jack up production.
Indeed, The North Face logo is now a ubiquitous sight in suburbia and urban centers across the country. But the increased demand has raised the question: Should the company expand its distribution beyond specialty outdoor shops to mainstream retailers like
, a unit of
The popularity among nonoutdoor enthusiasts helped boost net sales 36% to $68.1 million for the third quarter ended Sept. 30, 1996 from $50.1 million in the comparable period of 1995. Earnings in the third quarter jumped to $7.4 million from $4.6 million, excluding one-time charges.
In a very real sense, The North Face finds itself benefiting from the same strain of fashion sense that makes rugged four-wheel-drive vehicles popular. It's not like America is suddenly turned into a bunch of off-road driving maniacs. Also, Americans are not necessarily jamming the mountain slopes with a populist revival of Sir Edmund Hillaryesque adventure. But the attraction to the rugged, outdoor image has helped North Face's product sales boom.
Unfortunately, the attractiveness of its products has not led to a boom in its stock price. Since a secondary offering in November, the company's stock has slid from 22 1/2 to 19 1/8. And despite the likelihood of a potential earnings windfall--and likely stock-price boost--that would result from selling to new channels, The North Face is adamant about not taking that path.
"If nontechnical people want to jump on, that's fine, but we're not trying to appeal to a less technical consumer," says William N. Simon, the company president. "We would lose the appeal or panache of the brand."
Surprisingly, Wall Street analysts who usually focus on how companies can squeeze an extra couple pennies of earnings into the next quarter are applauding this cagier, long-term growth strategy.
"They are protecting brand-equity by maintaining clean distribution," says Shelly Hale Young, an analyst with
Hambrecht & Quist
in San Francisco, who has the stock rated a strong buy with a six-month price target of $25. Hambrecht was a co-underwriter of the company's July 1996 IPO and November 1996 secondary offering along with
Alex. Brown & Sons
was the lead underwriter.
Young adds that it would be "disastrous" for North Face to enter new channels of distribution, citing
as an example of a company that she views as at risk of losing its identity by selling its products to mainstream retailers.
Within existing channels, Young believes the company can increase bottom-line growth by more than 30% annually in the next couple years. She expects that earnings-per-share will jump from 58 cents on $156 million in revenue in 1996 to 81 cents on $197 million in revenue in 1997. In fiscal 1998, she expects the company to earn $1.10 a share on $242 million in revenue.
The major catalyst for this growth is Tekware, a new line of products launched last January that already makes up 7% of the company's revenue. Tekware garments are made with a
(DD:NYSE) nylon and polyester weave that is stronger, lighter and dries more quickly than natural fibers.
Almost 80% of Tekware sales are to city slickers who want clothing that "feels great and looks great for use around town," says Simon. The company is broadening its product range to offer high-quality backpacks, duffel bags and gloves at lower price points to appeal to these customers.
While business is booming, the November secondary offering, which came less than five months after the IPO, raised some eyebrows on Wall Street, especially since 60% of the proceeds went to two company insiders and venture capitalists.
But some investors are unconcerned about the insider selling. They note that management went out and defended themselves on the road show when they could have sold their shares in small allotments on the open market, says Andy Graves, a money manager with
, a Jackson Hole, Wyoming firm that owns a chunk of North Face stock. Graves sees The North Face as a good bargain at current price levels.
The $22 million in newly raised capital that the company received is being used to expand the number of Summit Shops--year-round concept sections within select outdoor retailers like EMS and Paragon--and to open a new research and development facility.
By Avi Stieglitz