Converse Rocks. Will Its IPO?

When it comes to shoe fetishes, Imelda Marcos has nothing on Wall Street. Shares of shoemakers routinely become objects of obsessive desire until, too often, they end up in closets dodging dust bunnies. In the '80s, there was glitzy L.A. Gear. It went bankrupt. Then there was Candie's, famous for supersexy mules--and a stock that sank 94% in 18 months. Shares of Skechers USA (SKX ) and Vans (VANS ) both zipped up and down. Even the group's goliath, Nike (NKE ), saw its price-earnings ratio race from 9 to 57 before slinking to 16.

Now, here comes Converse. Again, that is. Stock in a prior Converse incarnation finally ceased trading last summer near a nickel a share. In 1997, it had touched $28, but four years later the company wound up in bankruptcy. At auction, new owners got Converse's brands, including the distinctive Chuck Taylor All Star high-top sneaker. Today, the new Converse is thriving and aims soon to sell stock in an initial public offering led by Morgan Stanley. Chances are good that Converse's familiar name will fire up even this chilly IPO market. But, I wondered, might the stock burn you?

Converse executives at the company's North Andover (Mass.) headquarters have been staying quiet ahead of the deal. A registration statement, however, tells a turnaround story, starting with Converse's decision in 2001 to move all production from the U.S. to Asia. In the States, Converse has been busy designing lots of new styles while fostering fresh interest in Chuck Taylors and other vintage models that are the retro fashion choice for swaths of teens who see them on such punk-styled pop singers as Avril Lavigne. In opposition to, say, Nike's $200 Chrome Air Payton IVs, Converse stands as a cool reverse status symbol.

Converse has deals with such outlets as Nordstrom, J.C. Penney, Foot Locker, and Journeys stores. A designer line even got a toehold in upscale spots, including Barneys New York and Neiman Marcus. Wondering about typical retail displays, I hit the Melbourne (Fla.) Square Mall and saw Converse shoes out front at Foot Locker (Z ) and Journeys. Chuck Taylors--or as kids call them, "Chucks"--go for $39.99, and other styles up to $64.99. "They're hugely popular," Journeys store manager Heath Hultz told me.

Such demand, along with the lower costs of Asian production, are having the intended results on Converse's income statement. The company has yet to disclose full-year figures for 2002. Through the first three quarters ended Sept. 30, its revenue rose 32%, to $160 million, and net profit more than tripled, to $17.5 million. The backlog of orders stood 32% higher, at $72 million. Growth? Converse is aiming at women and younger children, while extending the brand to more apparel items.

It all sounds pretty good. But the unavoidable question is, how much? Converse has yet to disclose a tentative price for the stock or how much of the company it hopes to sell. Once it does, there are a couple touchstones. First, other shoe stocks are close to Converse in size and market position: K-Swiss (KSWS ), Skechers USA, Steven Madden (SHOO ), and Vans (table). Even using the high end of multiples these stocks go for, a total market value over $350 million for Converse looks generous.

Does that sound too low for an outfit billing itself as "America's Original Sports Company"? Perhaps, but also check the fair market value put on the company last fall when it issued stock options: $71 million, "as determined in good faith by the board," Converse's registration statement says. Naturally, stock in a public company that can be sold at a moment's notice will fetch more, maybe a lot more, than private-company shares. How much more, the market will decide. How much more you're willing to pay is up to you.

By Robert Barker

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