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The Prince and the Pauper of Internet Retailing

Investors reacted quite differently to Web-site launches by Authentic Fitness and Active Apparel.

All Internet announcements are not valued equally.

Take the case of

Authentic Fitness

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Active Apparel


. Both sell athletic apparel in the real world through department stores, or in Authentic's case, its own retail outlets. Both have licensing deals with well-known brands -- Authentic Fitness with


and Active Apparel with


. And this month both announced Internet launches.

On Dec. 7, the day that Authentic Fitness said it was going online, the stock dipped 3/16 to 15 11/16, although it has since traded up to 18 1/4, where it closed Thursday. Meanwhile, last Monday's announcement by Active Apparel sent that stock soaring more than 1,000% to 19, though its stock has since dropped to 8 1/8. That's still a substantial premium over 1, where the stock had languished prior to its Internet debut.

That difference is even more striking given that Authentic Fitness already has hundreds of millions in annual sales and sizeable profits. For the year ended in July, the company earned $22.7 million, or $1.02 a share, on sales of $367 million. And the

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consensus estimate is for the company to earn $1.25 a share in its current fiscal year, a 20% growth rate.

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Active Apparel's business, by comparison, is a fraction of that. No analysts follow the stock so there are no estimates for 1998. But in the four quarters ended in September, the company lost $49,734, or 2 cents a share, on sales of $16 million.

Nevertheless, at its high point Tuesday when the stock traded at 2.5 times revenue, investors awarded Active Apparel a higher valuation than Authentic Fitness, which was trading at one times revenue.

Working in Active Apparel's favor was a barrage of media attention, a small stock float and the company's relative obscurity before its Internet announcement.

In addition to the standard-issue press release, Active Apparel's Chairman and Chief Executive George Horowitz made the media rounds, including guest appearances on


and other financial news programs. Suddenly, Active Apparel had something to say and investors across America were listening. With only 2.5 million shares outstanding, it didn't take much to send investors into a buying frenzy. And ironically, since Wall Street didn't care much about Active Apparel before this announcement, the company was getting a fresh start. Investors didn't have to contend with bad memories of the stock the last time the company missed analyst earnings estimates, because there weren't any estimates to miss.

Authentic Fitness, on the other hand, is run by Linda Wachner, who's often been lambasted in the press. It's not surprising then that she tends to shun media attention, instead preferring to build her business one sale at a time. With 22.9 million shares outstanding, Authentic Fitness would've needed demand with the appetite of Godzilla to fuel a buying frenzy. And the company, which is widely held by institutional investors and tracked by analysts, already has a history on Wall Street. Just last summer the company's earnings and stock took a hit when it had to take heavy swimwear markdowns.

"Linda's attitude is, 'I'm building a company and customers will come. ... I don't need the media,'" says a New York money manager, who owns some Authentic Fitness shares. "That strategy makes more sense, but it doesn't pay in today's market."

Authentic Fitness didn't return a phone call seeking comment.

"Nobody cared about Active Apparel until George Horowitz showed up on


," the money manager continues. "It's like a first date."

Horowitz says Active Apparel didn't solicit media attention but merely responded to interview requests. He adds that in addition to the Web site, his company will grow through the addition of the Everlast license for men's activewear and swimwear. Currently the company only has the license for women's activewear, which was expected to generate about $15 million in revenue this year, or 90% of the company's total, he says.

"Investors are willing to pay 115 times sales for


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, so two times sales for Active Apparel looks like a bargain," says a person who follows these stocks but holds no position in Active Apparel. "But is it?" He figures Active Apparel is worth about 3 a share.

"A lot of the companies issuing press releases want to jump on the Internet bandwagon," says Dan MacKeigan, a research associate for

Friedman Billings Ramsey

. "And the announcement drives the stock." Friedman has no relationship with Active Apparel or Authentic Fitness. "But there are plenty of other companies that are trying to strategically place themselves on the Internet."



, another brick-and-mortar retailer that's been online since April, is building its e-commerce quietly and slowly. No press release accompanied the launch, and the company has only mentioned its Web business in quarterly financial statements.

"We haven't advertised," says William Spoehr, vice president of finance. "It's a start-up effort," he continues. "We wanted to make sure we did things correctly."

But in today's market, leaping before looking is paying off for companies -- at least in the short term. "A lot of these companies' primary products are press releases," says Morgan Frank, a portfolio manager with

Hollis Capital Management

in San Francisco. "But those who stray too far from basic economic principals will get the hosing of a lifetime."

In the meantime, investors have become conditioned to buy on the press release without taking into account a company's long-term prospects, or whether certain competitors are valued more cheaply as is the case with Authentic Fitness.

"It becomes a self-fulfilling prophecy," Frank says. "Things that are outrageous start to seem normal."