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U.S. SHOE IS HELL-BENT FOR LEATHER
While it's certainly down-at-the- heels, U.S. Shoe Corp. seems an odd target for the California Public Employees' Retirement System, the giant pension fund. On Jan. 18, CalPERS announced it was adding U.S. Shoe to the list of underperforming companies it is pressuring to do better. Sure, the Cincinnati-based owner of Casual Corner, LensCrafters, and such shoe brands as Easy Spirit and Bandolino has seen its sales stagnate, its operating profits plunge, and its dividend wither. But recent moves by CEO Bannus B. Hudson, including a reorganization announced on Jan. 26, have already convinced other large shareholders that U.S. Shoe is finally on the mend.
Why the optimism, which has sent U.S. Shoe's long-battered stock up 59%, to about 14, in the past six months? Since last spring, Hudson and new Chairman Charles S. Mechem Jr. have been shaking up the dowdy old company, replacing legions of top executives and managers with outsiders recruited from R.H. Macy, Toys 'R' Us, Dayton-Hudson, and Nine West Group. Last fall, Mechem and other insiders bought sizable blocks of U.S. Shoe stock to underscore their bullishness. By the third quarter, U.S. Shoe's earnings, excluding a charge, were up 44%, to $12 million, on sales that were flat at $677 million. "I have a pretty high level of confidence," says Marina T. Carlson, whose Strong Common Stock Fund owns 800,000 shares.
Even CalPERS is guardedly optimistic, though it's sticking by its decision to agitate for better performance and changes in corporate governance. The pension fund has held a sizable stake in the company for more than a decade, and CalPERS General Counsel Richard H. Koppes notes that it is "always on the verge" of better days. "That's why we're not going to go away for a while," he says. Koppes met with U.S. Shoe's outside directors on Jan. 12 to push for more change.
CalPERS' skepticism is warranted. For all its recent steps in the right direction, U.S. Shoe has flirted with recovery several times before--with no lasting results. In the four years since he got the top job, Hudson, a former Procter & Gamble Co. manufacturing executive who once ran U.S. Shoe's LensCrafters business, has taken a restructuring charge, closed four factories, shuttered 922 retail stores, and folded the Liz Claiborne, Leslie Fay, and Adrienne Vittadini shoe brands. He also closed down T.H. Mandy, Caren Charles, and five other retail chains. His Jan. 26 reorganization included an additional $14.5 million charge for more cost-cutting and layoffs.
"SCREWED UP." Hudson clearly needed to make his latest move. The numbers prove that: From 1989 to 1993, sales rose 4%, to about $2.7 billion, but operating profits fell an astonishing 93%, to an estimated $7.4 million. Outsiders largely blame longtime CEO and Chairman Philip G. Barach, who resigned his chairman's post in March, for what ails the company. Analysts say Barach fought change tooth and nail. "New management dates from the day Barach resigned," says Ladenburg, Thalmann & Co. analyst Barry Bryant. While U.S. Shoe is "under intense pressure" from CalPERS, Bryant adds, "the irony is that this management is fixing what the last management screwed up for 10 years."
Barach, who was CEO for 22 years, offers no apologies. In fact, he seems almost gleeful when discussing his former company's dire situation. While asking that he bot be viewed as "some sour or old disgruntled ex-CEO anxious to get into harness and desperate for power," he questions the prospects for a turnaround and obliquely calls for Hudson's ouster. To underscore his disdain, in October Barach sold 15,000 U.S. Shoe shares--all he owned except for a few locked up in a retirement plan--at 10 3/8, not far above the 10-year low.
There are others who aren't so sure Hudson has the right stuff. Hudson lacks a merchandising background, and retailing consultant Kurt Barnard questions his ability to create the merchandising magic needed by a chain like Casual Corner or by fashion-sensitive shoe brands like Evan Picone and Bandolino. "Hudson is a very good man," says Barnard, "but he doesn't have the understanding of consumer mentality that is so essential."
But by hiring a fresh crop of executives and managers, Hudson has put U.S. Shoe back in the race. Now, all he has to do is prove he can make the company a winner--with a little prodding from CalPERS.
IF THE SHOE DOESN'T FIT...
How CEO Bannus Hudson plans to get U.S. Shoe back on track:
-- MANAGEMENT SHAKEUP Hired 13 new key executives; outsiders now represent almost half of U.S. Shoe's top management
-- DIVESTITURES Sold off the company's struggling Caren Charles and Ups 'N Downs apparel chains
-- COST-CUTTING Shuttered unprofitable Casual Corner stores, cutting the number by 7%, to 720, in three years
-- REORGANIZING Will take a $14.5 million charge for layoffs and cost-cutting, to shave $25 million from overhead
DATA: COMPANY REPORTS, UBS SECURITIES INC.Elizabeth Lesly in New York