Cover Story: Hot Growth Companies
HOW HOT ARE THEY NOW?
What happened to the sizzlers of '94
Back in early 1994, Bollinger Industries Inc. appeared as fit and strong as the well-toned models who grace its catalog. The maker of barbells, treadmills, and other fitness accessories posted sales of $42.4 million, after growing an average of 51% annually the three previous years. Earnings had soared an average of 61% annually, to $2.3 million.
Run by brothers Glenn D. and Bobby D. Bollinger, the Irving (Tex.)-based company combined flashy packaging and endorsements from celebrities such as Nolan Ryan to sell BunFirmers and Super Tummy Trimmers. The muscular track record earned Bollinger the No.49 spot on BUSINESS WEEK's 1994 list of Hot Growth Companies.
Too good to be true? Apparently. In June, 1995, outside auditors questioned accounting practices and management credibility at the fast-growing company. The auditor soon resigned, as did two of five directors. Panicked investors also bolted, leaving Bollinger with the second-worst two-year total return of the Hot Growth Class of 1994, ahead only of Network Six, a designer of government computer systems that has suffered from cost overruns. From a high of 15 1/2, Bollinger's shares have fallen to 2 1/2.
As for the brothers--who say internal controls and management expertise simply failed to keep pace with the rapid expansion--they're still at the helm. "Where you may have small cracks in your system, they become pretty wide when you grow like that," concedes Chief Executive Glenn Bollinger. The company has restated results for the fiscal year ended Mar. 31, 1995; it made just $69,000. It has also hired new executives in information systems, accounts receivable, and warehousing, and it has put auditing under the control of an outside director.
Bollinger is not the first highflier to come crashing to earth, nor will it be the last. While sizzling small companies can bring big returns, the risks can also be substantial. Taken together, the companies on BUSINESS WEEK's 1994 Hot Growth list generated total returns of just 23.7% in the past two years, compared with a 53.2% rise for the Standard & Poor's industrials. Small-cap mutual funds tracked by Morningstar Inc. also underperformed, rising just 23.6%. Why the difference? Growth rates often slow as small companies bulk up. Another pitfall: Fast-growth companies are often saddled with lofty earnings expectations. If results are subpar, they get hammered by Wall Street.
NETS AND KNITS. Still, some highfliers manage to continue to soar. Case in point: PeopleSoft Inc. of Pleasanton, Calif., the clear winner in the Class of '94. A software developer for the fast-growing market for networked client/server computers, the company had 1995 sales of $228 million. Since making the Hot Growth list, PeopleSoft has tallied eye-popping total returns of 719.5%.
Under founder and CEO David A. Duffield, PeopleSoft found a profitable niche selling software for payroll systems, budgeting, and other chores to clients such as AT&T and Hewlett-Packard Co. The key to success: With 41% of its 1,400 employees in customer service, it does a better job than most at ensuring that its software functions smoothly.
Another Hot Growth alum company that delivers what customers want: St. John Knits Inc., based in Irvine, Calif., which has posted total returns of 136.7% since 1994. The company sells high-end women's apparel. Unlike most clothing makers, St. John farms out only a fraction of production. The tight control--combined with strong designs--brings in industry-topping margins. "St. John Knits makes quality knitwear that women want and that they are willing to pay full price for," says Pacific Growth Equities analyst Eileen T. Murphy. St. John seems to have avoided the trap that snags many growth firms--expanding too fast and splitting its seams.By Willy Stern in New York and Wendy Zellner in DallasReturn to top