Description

Phoenix Footwear (PXG) markets moderate to premium priced casual and dress footwear and outdoorwear. While I’m not a big fan of retail at this point in the cycle, I’m bullish on PXG because (i) due to several non-recurring events in 2003, reported historical numbers do not reflect the current business, (ii) trades at 11.5x 2004E Adjusted PF eps, significantly below its comps which trade at 15+x (iii) business is doing very well, as evidenced by last quarter’s 10% organic growth, (iv) insiders own 50+% of the stock, so they are highly incentivized to maximize shareholder value, (v) upcoming equity offering will serve as catalyst and (vi) significant opportunities for growth with existing lines and through additional accretive acquisitions.

PXG sells footwear under the Trotters, Softwalk, Trask, Ducks names and outdoor apparel under the Royal Robbins and Audon lines. The company’s shoes emphasize traditional style, quality and fit, in an effort to better maintain a loyal consumer following that is less susceptible to fluctuations due to changing fashion trends. Target market for shoes are men and women aged 35-60 with suggested retail price of shoes between $60-$200. The outdoor sportswear, which should represent more than 25% of 2004 revenue, caters to consumers 25-55 yrs old with price points of $40-$120. The company outsources all production which enhances margins and minimizes capex. The company’s largest footwear customers are Nordstroms and Dillards, while REI is the largest customer for outdoor wear. A recently filed S-2 gives a more detailed business description.

Last year the company moved its headquarters, made several acquisitions and incurred several non-recurring items. Pro forma for acquisitions and excluding the non-recurring items, the company’s 2003 eps would have been $0.58 , instead of the $0.22 reported. Furthermore, each year for the next few years the company incurs a non-cash 401k expense. Adding back the $0.08 2003 charges yields an adjusted pf 2003 eps of $0.64. For 2004, the company is guiding to $0.90 eps (midpoint), including $0.11 of non-cash eps, which I added back to derive my adjusted eps pf of $1.01. I believe they will exceed this number based on their reported results in Q1 and my channel checks.


The company recent filed a secondary offering for approximately $5mm. Proceeds will be used to clean up the company’s balance sheet so it can do additional acquisitions. While secondaries can often have a negative impact on stocks, one should consider the following in this case: (i) The company does not “need” to delever, so if pricing is not attractive, they will walk away from the deal, (ii) management is not selling any shares in the offering even though it would be a good opportunity for them to sell given the stocks illiquidity (although Mr. Bloomberg, a 65yr old retiring member of the board, will sell some of his shares in the overallotment) , and (iii) I believe the offering will actually serve as a catalyst as the roadshow and assumed coverage by underwriter (wedbush morgan) will educate investors about this relatively unknown stock.

The company has also improved its management team and greatly enhanced its board with younger, more value-added members who can help the management team (20+years avg industry experience) take PXG to the next level.
The company expects to grow organically by introducing new products under its existing brands and increasing distribution of recently acquired lines through PXG’s existing sales channels. In addition, the company is looking for additional accretive acquisitions which fit in with their focus on non-fad oriented shoes and outdoor wear with fairly predictable revenue streams.

Catalyst

Secondary offering this summer
Growing investor awareness