Is Reebok Worth Running With?


By David Shook The business press applauded an apparent turnaround last year at frequent underperformer Reebok International (RBK), the perennial No. 2 athletic footwear maker behind market leader Nike (NKE). The Canton (Mass.) company had lots of things going its way.

Pitchman Allen "The Answer" Iverson of the Philadelphia 76ers had been named MVP of the NBA, spurring sales of his Reebok shoe. The company was beating its modest earnings targets, and the stock was climbing. It hit a 52-week high of $35.75 in July, shortly before Reebok announced a deal to be the exclusive apparel licenser to the NBA, an agreement that should pay big dividends in years to come.

Then, triggered by profit-taking and a broader decline in retail stocks after the September 11 terrorist attacks, the stock went into a free fall from August to October that wiped away 48% of its value. Was the decline simply a setback in the Reebok turnaround, or is there more to the story? Since hitting a 52-week low of $18.50 in October, Reebok shares have steadily recovered, closing at $27 on May 3. But potential problems are lurking beneath the surface.

THE SHOE DROPS. Reebok beat analysts' estimates again in the quarter ended Mar. 31, although the hurdle wasn't high. First-quarter net income was $37 million, or 58 cents a share, a 10% decline from profits of $41 million, or 68 cents, the previous year. Net sales fell 4%, to $736 million. Nike, meanwhile, recorded a 31% profit increase, to $126 million ($1.46 a share), in its most recent quarter ended Feb. 28, while sales climbed 4%, to $2.3 billion, vs. a year earlier.

One troubling number buried in the earnings release was U.S. sales of the Reebok shoe brand, certainly the company's bread-and-butter business. It declined 5.8% from last year, to $247 million. Reebok said the drop should not be a concern for two reasons: Store deliveries of its new walking shoes were delayed, and inventory reductions of older sneaker models at the retail level incurred high costs. Reebok Chief Financial Officer Ken Watchmaker says the older stock went to outlet stores "to allow retailers to get more fresh goods."

Yet with Reebok talking about a turnaround for more than two years now, and with Nike's U.S. sneaker sales up 7% in the most recent quarter, Reebok's disappointment in the U.S. sneaker market may be cause for concern, especially for investors. "Reebok's management has good spinmeisters. But in a lot of the core markets, it's still getting its lunch eaten," says Margaret Mager, analyst for Goldman Sachs.

GUARDED STATEMENT. Reebok's exclusive apparel deals with both the NFL and the NBA should begin to accelerate sales this fall. Moreover, its forward sales estimates -- measured by the backlog of open customer orders scheduled for delivery from April through September -- increased 6.1%, an indication that Reebok may be gaining market share in the key specialty sporting-goods stores, where much of its merchandise is sold at full retail prices.

Still, Watchmaker stopped short of saying Reebok shoe sales growth would definitely turn positive in the next quarter. "We've told the financial community that we expect to grow revenue this year, that we expect it to have positive year-over-year growth in the third and fourth quarters. However, we expect the apparel business to grow at a faster rate," he said, due to the exclusive marketing rights with the two leagues. That business grew 46% in the first quarter, to $72 million. During a conference call on Apr. 25, Reebok announced that its licensed-apparel revenue could reach $220 million this year, nearly twice what it produced in 2001, says analyst John Shanley of Wells Fargo.

While the apparel deals no doubt will be a boon, they don't mask a disappointing performance in the core sneaker business. Reebok is banking on a fairly new management team in charge of sales and design and a tremendous marketing push toward young male basketball fans, including an 18-city promotional party tour this summer, featuring basketball superstars and hip-hop music artists brought together to endorse the Reebok brand.

Will that give Reebok some of that cool mojo Nike has always enjoyed with its sneaker brand? That's more of a long shot, and it's another risk factor for Reebok shareholders to consider. It also means the turnaround at Reebok could trip over its laces along the way. Shook covers financial markets for BusinessWeek Online in New York


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