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A Sporting Chance at Market Gains
By
Michael Brush
November 10, 2005
The home of well-known brands in sports like Spalding, Huffy and American
Athletics, the Atlanta-based Russell (RML)
makes apparel and equipment used by some of the finest athletes around.
But when it comes to running a business, Russell looks more like a
third-string bench warmer.
Since July, shares of the company have gotten clubbed because of a series of
logistical mishaps -- plus a few hurricanes. The stock fell below $13 in
late October from above $21 last July. Recently it struggled to climb back
up above $15.
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No one can predict that hurricanes won’t ever disrupt Russell’s supply chain
in the future. But when you look at the Keystone Cops kind of logistical
snafus that have benched the stock, you have to think that a little focus by
management could easily turn this company into a champion once again.
After all, most of the problems plaguing Russell seem fixable. This might
explain why insiders themselves stepped up and bought around $200,000 worth
of stock in the sell off at prices at about $13.60.
Take a look at the snafus that management says tripped up the company, and
judge for yourself.
* Hoodwinked by hoodies. Coming into 2005, Russell duly bulked up on
popular hooded sweatshirts. But by late spring it noticed an unusual surge
in demand for hoodies, which customers preferred over the traditional crew
neck cut. Russell tried to shift production. But it says it didn’t have
enough workers trained to produce hoodies, which are more complicated to
assemble. That left a lot of demand unmet.
* Fleeced by fleece. Likewise, a new Russell line for this fall,
known as brushed fleece, was well received in pre-season tryouts. Russell
aggressively sold the line ahead of time. But quality issues cropped up in
production, and the company failed to meet demand.
* Pounded by price cuts. Meanwhile, competitive pricing this year in
“art wear” – or casual wear with stamped patterns and logos – boosted demand
for clothing produced under Russell’s Jerzees brand. The company says it had
trouble tweaking production to meet the surge in demand, partly because of
tight labor markets.
* Hurtin’ in Honduras. Many of these challenges cropped up while
Russell was in the midst of bringing a new plant on line in Honduras – not a
good time for the marketplace to ask you to shift gears quickly.
* Haunted by hurricanes. Then came Hurricane Katrina. Russell lost
more than forty containers of goods. Even worse, it lost access to the ports
it used to ship fabric to contractors in Central America and the Caribbean,
and bring finished goods back to the U.S.
* Panicked over polyester. Because of the hurricane, polyester
producers invoked contract clauses that allowed them to cram a 20% price
increase on buyers, including Russell.
* Whacked by Washington. Meanwhile, delays in the implementation of
the Central American Free Trade Agreement meant Russell had to pay higher
tariffs than it expected.
Now if all this sounds like the typical litany of excuses that company trot
out whenever they want to cover up mismanagement, I don’t blame you. Many
investors thought the same thing, apparently, and bailed. On the other hand,
would insiders really have bought stock, knowing they were publicly using a
string of empty excuses to cover up a rotten business? I doubt it.
About the only thing that went wrong last quarter that may be hard to fix
was a decision by Wal-Mart (WMT)
decided to stop carrying the Jerzees fleece products for boys. That hurts.
But Wal-Mart will continue with the men’s line of fleece products. More
importantly, Russell is still the number-one domestic supplier of team game
and practice uniforms – it is a big player in the college space. And it has
leading brands in active wear, hunting apparel, athletic footwear, and
women’s sports apparel, thanks to an acquisition campaign over the past
several years. Those strengths aren’t going away because of a quarter or two
of logistical mishaps.
The bottom line: Like the insiders, I’d bet that Russell can figure
out how to overcome the logistical challenges, and have enough luck not to
get hammered by hurricanes again any time soon. Meanwhile, the stock is
cheap. Russell trades below book value, and it carries a miniscule price to
sales ratio of .35. It also has a forward price earnings ratio of about ten.
Historically, it has traded for about eighteen times earnings. That’s a
discount that’s hard to resist in a retailer with a stable of solid brands.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in
any of the companies listed in this column. Mr. Brush is an independent
columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About
Insiders Corner:
http://www.investorideas.com/insiderscorner/. InvestorIdeas.com
Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not
affiliated or compensated by the companies mentioned in this article.
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