Roger Farah's attempts to turn around
these days seem to evoke images of a captain struggling to navigate shoals in gale force winds. Despite the chief executive's best efforts to restructure one of the nation's oldest retailers, sales and earnings continue to sink at an alarming rate.
consensus pegs the company's earnings for the year ended in January at 4 cents per share. Venator is expected to report March 10. That's a long way from the $1.26 per share the company earned in fiscal 1996, Farah's first full year at the helm. Adding insult to injury,
Standard & Poor's Rating Services
recently lowered Ventor's credit rating, casting a shadow on one of Farah's achievements -- lowering the company's debt to about $600 million from $1.2 billion.
"We believe the company's prospects are so problematical that we are unable to provide an EPS estimate" for fiscal 2000, Bernard Sosnick, an analyst with
JWGenesis Capital Markets
, wrote recently. He rates Venator a hold. His firm hasn't performed underwriting services for the company.
It's no wonder that in recent weeks as Venator's stock traded below 5 -- it closed unchanged Monday at 4 15/16 -- analysts and investors have begun to speculate about the company's fate.
Even as Venator tries to fine-tune its merchandise at its athletic-specialty stores -- including programs like its exclusive contract with
to sell the popular
sneaker -- it must struggle against larger industry-wide problems. The athletic sneaker and apparel business is suffering with flat sales and excess capacity. And Venator is facing feisty competitors like
Just for Feet
. Both operate larger stores equipped with bells and whistles like basketball courts and big-screen TVs.
By any measure, 1998 was a difficult year for the athletic industry. Sosnick at JWGenesis estimates that athletic footwear sales declined 5% to $11.3 billion, while athletic apparel sales fell 15% to $15.3 billion. Venator, which saw same-store sales decline 5.5% in its most recent fiscal year, took its share of bruises. As the largest athletic specialty retailer with some 5,900 stores under the
Lady Foot Locker
Kids Foot Locker
names (as well as direct marketer
), Venator's fortunes are likely to move in lockstep with the industry.
The recent resignation of Reid Johnson, Venator's chief financial officer, as the company was preparing its annual financial statements has done little to ease concerns about the company's prospects. Furthermore, Johnson left in the midst of reworking an important credit agreement with Venator's banks. As the company's fiscal third quarter filing with the
Securities and Exchange Commission
notes: As a result of lower-than-expected earnings, the company "obtained a waiver with regard to certain financial covenants contained in the revolving credit agreement for the period from Oct. 31, 1998, through March 19, 1999."
With Johnson gone, that leaves his successor, former controller Bruce Hartman, to broker the deal.
"We continue to work with our banks to get the credit facility amended," says Juris Pagrabs, a Venator spokesman. "We expect to have it completed by March 19."
Farah may shed some light on this development and other news when he addresses investors at a
conference in New York Tuesday morning.
While considered a positive development, a new credit agreement will do little to solve Venator's long-term problems. For example, the company is locked into leases in a large number of small, less-profitable locations.
But Venator is the largest single customer for many athletic manufacturers, which conceivably will go to great lengths to keep the company afloat. For instance, it accounted for 11% of Nike's sales last year, the largest amount purchased by any single Nike customer. Nike declined to comment.
Still, should Venator's business continue deteriorating, there's little that Nike or any other supplier can do, aside from being generous with credit terms, to help the company regain its footing. And an uphill battle lies ahead.
Venator, in an attempt to revitalize sales of athletic apparel, stocked up on private-label merchandise as a way to differentiate its stores from competitors selling branded apparel and team-licensed jerseys and hats. Yet athletic apparel has taken an even bigger hit than sneakers this year, as kids have opted to buy
athletic T-shirts and
Abercrombie & Fitch
sweatshirts instead of traditional
jerseys and the like.
By the fiscal third quarter's end on Oct. 31, Venator's inventories had swelled 25% over the year-ago period, although sales had increased just 1.3%. This bulge occurred even as Venator aggressively marked down merchandise to clear it from stores.
It's more important than ever that business at the Foot Locker stores improve as Venator nears the end of its restructuring. Since making the historic move to shutter its once namesake (Woolworth) dime stores, Venator has sold its corporate headquarters and exited numerous businesses, most recently its international general merchandise stores and specialty shoe division, including the
shoe chain. But Pagrabs says the Kinney divestiture was the last major restructuring move.
Challenges notwithstanding, the Foot Locker name has value. Even the smallest hint that business is improving could send the stock higher.
If Venator resolves its problems, "this stock could hit 10 in a second," says a person who has been short the stock for two years and recently covered half of his position.
So despite the choppy waters, it seems, investors need not reach for the life jackets yet. But it may be good to keep them close by.