Vans Can’t Quite Skate Away From Its Park Closure Losses

0

CORPORATE FOCUS

Vans Can’t Quite Skate Away From Its Park Closure Losses

By RiSHAWN BIDDLE

Staff Reporter

Vans Inc. may be phasing out its ill-fated foray into skate parks, but the Rancho Santa Fe-based shoemaker is under scrutiny by at least one Wall Street analyst.

The problem, says Wedbush Morgan’s Michael Pachter, is that the skate park business is still on Vans’ balance sheet and that the company is using pro forma data to distinguish its performance from the rest of the operations.

He acknowledges the treatment conforms to accounting regulations that were strengthened after Enron and other recent scandals. But to him, the emphasis on pro forma numbers smacks of bubble-era self-promotion.

“They’re fixated on getting investors to look at the good numbers and not at the bad numbers, the real earnings,” said Pachter. “They’re trying to get investors to forget that management made a big mistake. I’m not going to bite.”

Others have been. Vans’ stock recently reached a new 52-week high, and at a closing price of $12.66 on Jan. 28, shares are up 15 percent year to date.

Driving the gains is a bet that Vans’ tough times are over. During the late 1990s, the company grew popular among skaters and other extreme sports enthusiasts thanks to such marketing schemes as the Warped music tour and the skate parks.

But the skate park business deflated after cities started opening free public skate parks. Vans also missed out on the retro footwear craze. So the focus moved to the core sneaker business.

Domestic shoe sales volume for the second quarter ended Nov. 29 rose 7 percent over the like period a year earlier. Revenues were $65.2 million, a 9.5 percent increase.

“We built the brand. Now it’s time to provide products that keep it going,” said Chief Executive Gary Schoenfeld, who took over in 1995 after helping rescue the firm from bankruptcy.

Pachter, who issued a “sell” rating on the stock in December, believes Vans is being disingenuous in using pro forma data a bit of financial legerdemain used during the 1990s to pump up stocks to hide the skate park business, which continues to be a drag on earnings. He notes that while the shoe sector may be profitable, it remains mired in losses thanks to charges related to shutting down the parks, including $1.9 million in lease cancellations.

Pachter also questions why the skate parks are broken out as “discontinued operations” even as the division continues to contribute five percent of Vans’ revenues. The company couldn’t actually do so under Generally Accepted Accounting Principles because the lease cancellations are considered a mere business expense. But by breaking them out in a pro forma measure, it can get investors to consider them “extraordinary” costs, and in the process, distract them from the full picture.

Schoenfeld said investors asked Vans to issue pro forma numbers so they can get a clearer picture of remaining operations.

Schoenfeld said it will shut down all but three of its remaining seven parks within the next 18 months. Lease cancellation charges will no longer hit the bottom line after the fiscal year that ends in May.

“Michael Pachter is entitled to his opinion, but we don’t agree with it. He’s in a distinct minority for sure,” said Schoenfeld.

Founded in 1966 as a shoe retailer, Vans took off in 1982 thanks to the teen flick “Fast Times at Ridgemont High,” which featured the shoes hitting the head of its star, Sean Penn.

Once the fad ended, the company was left with excess capacity, which led it into bankruptcy in 1984. After Schoenfeld arrived in 1995, it welded itself to the extreme sports markets, eventually sponsoring the 2002 skateboarding documentary “Dogtown and ZBoys,” before the retro trend caused the company to wipe out.

Pachter agrees that Vans is turning things around. But he questions why it continues to trade at 15 times future pro-forma earnings, a higher multiple than that of either K-Swiss Inc. considered a hot brand or Oakley Inc., whose shoes and sunglasses are considered upscale.

He points out that the skate shoe segment has become increasingly competitive, as rivals such as DCShoes Inc. have moved in with hip, higher-priced offerings. Another looming rival: Nike Inc., which is breaking into the market.

Schoenfeld said Vans is reaching into the upscale crowd by rolling out a $100 shoe that will be sold at boutiques. To energize its line of girls’ shoes which contribute 25 percent of revenues it brought in shoe veteran Andrea Magerman to freshen up the look, and launched a “beats meets the streets” campaign that features female surfers.

No posts to display