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Why Investors <I>Still</I> Could Get Trampled by Just For Feet

Also, an important reminder on Tel-Save, er,, and a bit of Lernahoulian levity.

Thursday Thwack:

How low can it go?

: When one of my good (but always anonymous) shortselling sources mentioned

Just for Feet


to me yesterday as one of his current favorites, I couldn't help but say something like, "Ya gotta come up with something better than THAT! The stock has already been trampled. The bad news is already out. Most analysts have


turned sour!"

This shortseller then reminded me that we had the very same conversation when he first told me about

Leasing Solutions


last November, which had already been cut by 40% to 15 when it first appeared in this

column, and has subsequently fallen to 1. Height, this shortseller says, is relative, especially when a company's fundamentals continue to unfurl. Yesterday, Feet closed at 7 9/16.

The fundamentals in question this time around are inventories. At Feet, a sneakers superstore, they're outa control; outa control, I tell ya. And they've been outa control for months. Just go back and re-read my colleague

Suzanne Kapner's

take, in March, when inventories growth was just as explosive, and the company told her not to get sucked into worrying about total inventory because the company had been opening new stores.

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Since then, however, inventories have done nothing but go higher at a much higher rate than new-store openings. As recently as the January quarter, inventories were at an uncomfortably high 292 days, or nine months. Nine months! "Nobody wants to buy nine-month-old sneakers," this shortseller says. (Compare that with


(FTS) - Get Fortis Inc. Report

, and


(Z) - Get Zillow Group Inc. Report

, which are running in the low- to mid-70-day range.)

Running a retail biz, this short says, involves selling half your goods at full price and the rest at a discount so it'll move. "If you want to make things look better than they are, you sell your good stuff and bury the bad in the back room," he says. If that's what Feet is doing, he concludes "the company isn't earning money on a real operating basis," because only the profitable goods are being sold. The end result, he says, is that the company could be forced to dump that merchandise in future quarters, "and that would be catastrophic because they'd be selling everything at below cost."

To which CEO Ruttenberg replied: "Anonymous sources don't deserve a response. Anybody who is anonymous is not worth commenting on." When pressed about the short's contentions, Ruttenberg added, "it's not true."

Maybe, but earnings at the former high flyer missed analyst expectations in the most recent quarter, which was reported earlier this week. Ruttenberg then made a point of saying the company plans to reduce inventories, which will put pressure on margins. But our shortselling source thinks that's too little too late at a company that pays high rents for space that, in many stores, includes such large square-footage amenities as a basketball court that don't generate profits. "I believe that the company inherently is a money-losing concept, and they've been hiding the fact by playing games with their inventory."

What's more, Feet is sweating cash at an ever-increasing rate. Just yesterday

Standard & Poor's

cut its rating on Feet's bonds from a double-B-minus to a single B-plus, saying that it believes the company could be in violation of certain bank covenants by the end of the second quarter. That's not all. S&P said it isn't sure Feet can "generate consistent improvements in profitability over the next few years." Years, not quarters! And that's from an S&P's bond analyst, not some shortseller.

No wonder investors are


running for the exits.

Just a reminder

: As the former





has been disclosing in a registration statement for several months now, and as it reiterated in an amendment filed yesterday, as of June 1 (Tuesday, bubs)

America Online


may sell up to 4.1 million shares of its stock. For 16 subsequent months, Talk has agreed to reimburse AOL for any losses suffered from the sale. The maximum hit Talk could take would be around $54 million, according to the registration statement. The important part: AOL purchased the shares for $55 million; today those same shares are worth $43.5 million.

Lernahoulian alert

: From


Lernout & Hauspie


message boards, in response to an item here

yesterday that cited those very same boards: "Ok, Herb, so now your latest article proved one big thing: yes you do read this board."

No, you Lernahouliot, read silently while I reread the pertinent part of yesterday's item aloud: "Spotted by this col's other pair of eyes,

Mark Martinez


Translation: Mark, my assistant, reads the boards in pursuit of copyright breaches. (I don't have time for that kind of nonsense.) In the process, he passes along anything that he believes will give my day a dose of Lernahoulian levity.

Herb Greenberg writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at Greenberg also writes a monthly column for Fortune.