Ten men tear up and down the court on a steamy evening in a Trenton basketball league match between Klotz’s Bar and Stewart’s Deli.
Every player wears Nike Inc. shoes. On the sidelines, it’s mostly the same: Nike everywhere, with a few spectators wearing Reebok International Ltd. shoes. Missing is Fila SpA, No. 3 in the U.S. athletic shoe market–and it’s easy to see why.
“It’s a corny brand,” said 23-year-old Sam Council as he surveyed the crowd. “Look around–nobody’s wearing them.”
That’s bad news for the Biella, Italy-based company. Athletic footwear fashion is dictated by the tastes and styles on the basketball courts of America’s mostly black inner cities. Losing out there means shoes that linger on store shelves–which retailers say is just what happened.
“Bottom line, they did not buy them,” said Jenee Fratangelo, a footwear buyer for Oshman’s Sporting Goods Inc., which stopped ordering Fila shoes about 10 months ago.
There’s another bottom line that’s in trouble: Fila’s. The company warned in July that second-quarter earnings would fall at least 30 percent short of forecasts because of slowing sales and order cancellations in the United States.
Warnings like that are about as helpful as a sprained ankle for Fila’s American depositary receipts, or ADRs. (Instead of buying shares of foreign-based companies overseas, Americans can buy shares in the U.S. in the form of an ADR.) The ADRs, which closed at a record high of $105 last September, recently traded at about $34, down 68 percent.
While the ADRs are out of favor with some investors, Fila has drawn attention from plenty of others–short sellers, or investors who borrow shares and sell them, hoping the stock drops so that they can buy them back cheaper, pocket the difference and return the shares to the lender.
About 2.18 million ADRs, or 8 percent of the 26.5 million ADRs outstanding, were sold short as of mid-July. That’s down from a high of 3.2 million ADRs sold short in March. Of course, the drop in Fila’s price gave many of those short sellers big gains as they bought shares back and closed out their investments.
Fila blames many of its recent woes on “market deficiencies” in the United States. In the second quarter, that translated into a spate of canceled orders that cut sales by an estimated $15 million.
The company also said that glitches in a new computer system at a warehouse in Baltimore delayed some deliveries, costing the company about $4 million in sales.
The delays were “a good opportunity for customers to cancel orders,” said chief financial officer Enzio Bermani.
Some analysts say the problems are more basic.
“They don’t have the shoes that kids want to buy,” said Peter Russ, an analyst with Shelby, Cullom Davis & Co.
That’s certainly borne out on the basketball court in Trenton, where complaints about Fila shoes are twofold.
“Nike comes out with better designs,” said Rupert Paul, 24, as he stood on the sidelines of the Klotz’s game against Stewart’s. “They know what people want.”
“They look ugly, with those big Fila words,” added Pete Lewis, 17.
Worse, the professional athletes the amateurs model themselves after aren’t backing Fila shoes.
For starters, Fila can’t come close to matching the selling power of Chicago Bull Michael Jordan, whose endorsement of Nike makes it one of the world’s best-known brands. Nor can Fila match Reebok’s stable of rising star endorsers, such as Los Angles Lakers center Shaquille O’Neal and Philadelphia 76ers guard Allen Iverson, the National Basketball Association’s most recent rookie of the year.
Bermani says the company will rev up a new marketing campaign for this year’s back-to-school season–one of the most profitable periods for sneaker companies–although Fila won’t have a new signature, athlete-endorsed shoe on the market. That will come in 1998, when it introduces a model tied to basketball player Chris Webber of the Washington Wizards (formerly the Washington Bullets), who recently signed an endorsement contract.
Meanwhile, older Fila basketball shoes, backed by the likes of Detroit Pistons star Grant Hill and the 76ers’ Jerry Stackhouse, are going nowhere.
The company last month forecast earnings of 53 to 60 cents per ADR, less than the 85 cents analysts expected. It earned 98 cents in last year’s second quarter.
The real test is whether Fila, like the athletes it aspires to win over, can bounce back.
