bauder evokes tricky dicky (jaffe) ...
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Safeskin's great expectations tumble into a big credibility gap
DON BAUDER
San Diego Union-Tribune
09-Apr-1999 Friday
On Feb. 10, chief executive Richard Jaffe of Safeskin, the maker of medical gloves, enthused that 1998 had been "a terrific year for Safeskin," and he predicted "another year of record results in 1999."
On March 11, the San Diego company revealed that earnings per share in its first quarter of 1999 would be 1 or 2 cents. Wall Street had been expecting 27 cents. Safeskin said there would be problems the rest of the year.
Analysts were outraged. Immediately, they dropped the company's rating from "strong buy" or "buy" to a "hold." Understandably, they complained of a credibility gap.
Up to then, Safeskin had been a darling of Wall Street. Sales had been
zooming 30 to 35 percent a year, and earnings per share had been soaring 35 to 40 percent annually.
The stock reached $45.83 in July 1998, but began falling last fall because some analysts noted a bulge in accounts receivable. Yesterday, the stock closed at $8.88, up 38 cents.
Last fall, responding to analysts' suspicions, the company said that the bulge in receivables did not suggest that Safeskin was stuffing the distribution channel -- shipping products early to customers to book a sale in one quarter rather than the following one, thus bolstering short-term profits.
"I do not believe that at the time (last fall) we had unreasonable
inventories," says David L. Morash, executive vice president and chief
financial officer. "The unreasonable inventories came in March."
But in making its announcement in March, Safeskin admitted that it had
misread distributor and customer inventories of gloves in 1998's third and fourth quarters.
"They attribute this to continuing poor reporting practices in the
industry," says Russell Mosteller, analyst for Merrill Lynch.
So, in a sense, it goes back to Richard Nixon's Watergate dilemma: If
Safeskin didn't know what was going on in the distribution channels, why didn't it know?
The company may not have been trying to jack up short-term earnings, but it certainly didn't understand what was going on in its marketplace. Fifteen lawsuits have been filed against the company, generally charging it artificially propped up earnings so insiders could dump shares -- a charge Morash heatedly denies.
In March, the company warned that competitive pressures were driving prices down. That didn't seem to jibe with Jaffe's bullishness in February.
But Morash says that in a conference call with analysts in 1998's third quarter, "we said that individual line item prices were declining 3 to 5 percent."
Safeskin had other problems: It took three months longer than expected to sign one major contract with a medical operation, and once the contract was signed, the company didn't need most of the gloves until the second quarter of 1999.
It wasn't until the company held a sales conference in March "that we
realized that distributors had much more product than we realized," says Morash. The company quickly revised forecasts and went public with them.
Some analysts were outraged. Gruntal & Co. had spoken with Morash on March 8. On the basis of his bullishness, it rated the stock a strong buy. Two days later, the company dropped the bomb.
But it would have been illegal for him to reveal anything to Gruntal that he was not revealing to other analysts, Morash says.
"Most of our analysts understand that a growth company will have a hiccup," Morash says, although he admits, "they are not happy."
Amen. When you're expected to earn 27 cents a share, but you announce it will be 1 or 2 cents in a quarter, analysts suspect that's more than a case of hiccups.
The cure is coming, Morash says. Pointing to a strategic alliance with
Owens & Minor, the nation's largest distributor of brand name medical and surgical supplies, Morash says, "we will rebuild our credibility" with analysts as business improves.
The deal, inked this week, should generate $9 million in incremental
revenues.
The lawsuits are a roadblock, though.
They allege that Safeskin knew that a big oversupply was developing in last year's second half. They say that while the company was relocating manufacturing facilities, there was a shortage of high-end gloves in 1997 and 1998, permitting the company to charge fat prices and ring up big profits.
From early 1998 through the March 11 bombshell date this year, insiders dumped 717,000 shares, according to one suit.
Meanwhile, for a period ending in September of last year, the company was buying back $70 million of stock -- in effect, buying back insiders' stock, one suit alleges.
In these suits, the lawyers' "sole interest is getting fees for themselves. All they do is attack growth companies," Morash says.
Don Bauder's e-mail address is don.bauder@uniontrib.com |
