Cash Still King, but Strategy Counts Too

NEW YORK — The majority of publicly traded footwear firms are well positioned for the economic downturn because they have been conservatively hoarding cash. But even a healthy cash situation may not be enough should a firm have more deep-rooted problems, or if it is carrying a large debt load, experts said.

“Cash gives you tremendous flexibility,” said Jeff Van Sinderen, senior analyst at B. Riley & Co. “If you don’t have cash right now and your business isn’t good, you’re in a world of hurt.”

Sam Poser, an analyst with Sterne, Agee & Leach, agreed that having cash is smart, but, he said, a company’s strategy during an economic crisis should go several steps further. “The most important thing is knowing who you are,” he said. While cash can allow companies to last longer in this environment, he explained, there’s often a difference between who the companies think they are and how they are actually viewed by the end consumer.

Certainly, this climate is not a safe time to have a wobbly business strategy. Even those that have cash, but whose businesses have been flagging for several quarters — or even years — may be inching closer to the edge.

“K-Swiss, Kenneth Cole, Timberland continue to deteriorate. But because of the quality of their balance sheets, they can try to weather the storm,” said Scott Krasik of CL King & Associates. However, he added, “If they didn’t have [the cash], they’d be in a lot of trouble.”

Said Poser: “[Cash] will help [companies] in the short run stay alive, but unless [some firms] get their act together, it’s delaying the inevitable. You can’t rely on the cash. You have to rely on developing your mantra for the brand and have everyone understand what it is.”

For example, Kenneth Cole Productions, which ended the most recent quarter with $51 million in cash and no debt on its balance sheet, but whose financials have been lagging for a couple of years, outlined a long-term strategy to investors on its recent quarterly conference call. Goals included improving marketing and merchandising and opening at least 10 new outlet stores.

Among a sampling of other footwear firms’ cash positions, Timberland Co. ended the last quarter with $63 million; Skechers USA Inc. had $151 million as of Sept. 30; and Deckers Outdoor Corp. had $35 million at the end of its third quarter.

One firm, Collective Brands Inc., stands out for a couple market watchers because of its high debt load, especially amid the weak economy and soft consumer spending. The firm, which in March 2007 bought Collective International for $91 million in cash and five months later purchased Stride Rite Corp. for about $900 million (of which $725 million was financed) had about $1.13 billion in long-term debt on its balance sheet at the end of the second quarter, up from $200.9 million the prior year. The firm’s cash position at the end of the second quarter stood at $451 million.

Still, Collective said in its second-quarter filing with the Securities and Exchange Commission that its “liquid assets, cash generated from operations and amounts available under our revolving loan facility will provide us with sufficient funds for capital expenditures and other operating activities for the next 12 months.” Collective will report earnings next week, and analysts are calling for earnings per share of 43 cents, which would compare with 39 cents a year ago.

Another firm, Brown Shoe Co., closed out the second quarter with $150 million in long-term debt — not enough to seriously worry analysts — and $64 million in cash. Brown is reporting earnings tomorrow, with analysts expecting EPS to fall to 17 cents, from 61 cents a year ago.

In the meantime, some analysts now advise firms not to initiate stock buybacks as a potential use of cash, or to even make acquisitions, despite what would likely be depressed acquisition multiples. Though Nike Inc. in late September initiated a $5 billion buyback program and Iconix Brand Group earlier this month announced a $75 million stock repurchase plan, big-box retailers Target Corp. and Macy’s Inc. recently suspended theirs.

No blockbuster footwear-related acquisitions have taken place for some time. However, Foot Locker Inc. recently closed on its $103 million acquisition of CCS, which it paid for in cash. And Iconix said on its most recent conference call that in terms of acquisitions, it had recently seen “a lot of really interesting brands” that it is “pretty excited about.” Iconix projects free cash flows to hit $118 million by Dec. 31.

As for other uses of cash, K-Swiss recently initiated a special $2-a-share cash dividend. But B. Riley’s Van Sinderen said the firm’s financial position should be fine for the time being. “K-Swiss only has 35 million shares outstanding, when they had $290 million in cash at the end of the third quarter,” he said. “It’s plenty of cash [to pay for the dividend], unless they start generating enormous losses.”

Indeed, John Shanley of Susquehanna Financial Group noted that K-Swiss has enough cash in its coffers, but he wrote in a report following the firm’s earnings report earlier this month that “an expected loss in fiscal year 2009 would begin to erode this [cash position]. While we do not believe the company is in any immediate financial danger, we also do not see any growth catalysts over the next year to make K-Swiss a compelling story.”

Finally, there is at least one more reason firms should make liquidity a priority: Adam Rifkin, SVP of Barclays Capital’s global retail/consumer group, said at a seminar last month, “Investors will push down a stock [price] if they think [the company] is running out of cash.”


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