Heard on the Street
Analysts Question Whether
Big Dog Is Able to Compete
By SUSAN PULLIAM
Staff Reporter of THE WALL STREET JOURNAL
On Wall Street, the phrase "big dog" is often used to
describe an underperforming stock. But these days, it
has taken on another meaning as well: a hot initial public
offering.
Big Dog Holdings, a Santa Barbara, Calif., apparel and
consumer-products retailer, is scheduled to launch a $45
million initial stock offering this week. But investors don't
seem turned off by the double entendre. Indeed, the 3.5
million-share offering is expected to be oversubscribed
and investors are being told the price range, initially $12
to $14, may be raised.
Big Dog Holdings
Business: Apparel and consumer products retailer
Financial Results
1996
1995
Revenue
(in millions)
$51.5
$68.7
Earnings
(in thousands)
$638
$635
Share earnings
$0.07
$0.06
Latest quarter (June 30, 1997)
Per-share earnings: $0.02 vs. $0.00
Why all the interest? Big Dog Holdings sells T-shirts and
other casual clothes which carry its logo of a big Saint
Bernard dog, mostly through the company's stores in
outlet malls. It also sells consumer products, from plush
animals to stationery and pet products. The company
said in its prospectus that its products appeal to baby
boomers and their children, especially those who have
recently become the owners of big dogs.
But some analysts warn the risk is so great that Big Dog
Holdings could well become a big dog of a stock. Forget
for a minute that Big Dog Holdings is in the volatile
apparel business, which can produce wild swings in
profitability, especially for companies that sell novelty
items. Set aside for a moment the fact that the company
has a long way to go before meeting its goal of
establishing itself in the minds of baby boomers as a
name-brand apparel maker.
Consider this: At $13, the midrange of price talk for the
stock, Big Dog would be given a multiple right out of the
starting gate of 20 times next year's earnings estimates of
63 cents. That's the same multiple of earnings accorded
shares of Ralph Lauren, arguably a more established
brand-name apparel maker. What's more, to meet the
company's anticipated 25% to 30% growth rate, Big
Dog will be opening new stores at a rapid clip. The
strategy may work, but Big Dog may also find that
demand for its apparel is more limited than it realized.
"The issue for them is that they need to continue their
store roll-out," said Linda Killian with Renaissance
Capital of Greenwich, Conn. The reason store openings
are so important, she said, is that Big Dog stores are not
"destination stores," meaning customers tend to wander
in on impulse, rather than make a special trip to buy their
merchandise. As a result, she said, same-store sales
won't be a big driver of earnings growth.
The company, which will have 12.9 million shares
outstanding after the stock offering, has 134 stores, and
plans to open 17 more in 1997 and 30 in 1998.
Why, with a Gap on every corner, do consumers need
more T-shirts and leisure wear, even if they do have a
picture of a cute dog on them? The answer offered in the
company's prospectus is open to interpretation. The
company's merchandise, according to the prospectus,
appeals to a broad range of customers when they are in
"the Big Dog state of mind."
What is "the Big Dog state of mind?" The filing doesn't
say, even though it uses the phrase repeatedly to
describe demand for its products.
The filing says the company's collection tries to "convey
a sense of fun, humor and a "Big Dog attitude," whereby
each customer can feel that he or she is a "Big Dog." "
T-shirt slogans include "If You Can't Run With the Big
Dogs, Stay on the Porch," and "Unless You're the Lead
Dog, the Scenery Never Changes." Among the
customers for whom the Big Dog brand is expected to
hold special appeal, the prospectus says, are "large-size
customers" because of the "positive image the brand
brings to being a 'Big Dog'."
Should demand for the company's dog logo take off, the
hurdle for knock-offs is low. At least one competitor has
already opened a "Top Dawg" store in an east Los
Angeles mall where one of Big Dog's stores was located.
Not a big worry at the moment, said Gregg Goodman,
senior vice president of leasing with Mills Corp., which
owns the Ontario, Calif., mall that houses both stores.
Big Dog's stores, he said, are "good performers," turning
out sales "at or above the mall average" of $307 per
square foot. The Top Dawg store sells mainly T-shirts,
and isn't expected to be a tenant in other malls, Mr.
Goodman said.
Still, enthusiasm for the deal is high. "The deal is
definitely hot," said Vinnie Slaven, who rates IPOs for
Cantor Fitzgerald and has given the deal an "A" rating,
his second-best rating. |
