It's still "cool" to arrive fashionably late to a party, right? I sure hope so, because it's been a good week already since Motley Fool Stock Advisor pick Reebok International (NYSE:RBK) reported its third-quarter earnings -- and celebrated its 25th anniversary -- and I've only just now gotten around to reading it.
For those who haven't seen it yet, the report's worth a full read. But for now, here's the CliffsNotes version: In the third quarter, Reebok sold nearly $1.2 billion worth of products, a 12% gain over Q3 2003 sales. Net earnings rose even more strongly, up about 42% over the year-ago period to $1.36 per diluted share.
Those numbers present quite a contrast to the company's year-to-date performance, during which sales rose 6.3% against the first three quarters of 2003 and net profits grew 12.1%. But take note: Those were companywide profits. Profits per diluted share grew even faster (17.6%) as Reebok both bought back shares outstanding and redeemed $250 million in convertible debentures -- both laudable exercises in stock concentration.
There were really only two red flags that jumped out of the earnings announcement. First, inventories rose 23% year on year (it's often a bad sign when inventories rise faster than sales and suggests an inability to move products).
Second, Reebok experienced a slight weakening in its collections department as accounts receivable rose 18% and days sales outstanding (DSO) increased from 54 to 59. There are two things worth noting there: First, when receivables grow faster than sales -- and 18% receivables growth compared with 12% sales growth certainly qualifies -- this suggests that a company's financial position is weakening. Second, it's interesting that competitor Saucony (NASDAQ:SCNYB) reported a similar weakening in collections efforts on Tuesday. But just as I was beginning to shoehorn this data into forming an industry trend (ha!), I noticed Nike's (NYSE:NKE) results, reported last month. While Saucony and Reebok are both having more trouble collecting on their bills, Nike's DSO actually decreased, from 61 to 55 days.
It's great for Nike shareholders if their company is improving collections at the same time as Nike's competitors' are diminishing. The question that prospective investors have to ask themselves, though, is whether they are willing to pay a 50% premium to Reebok's price (on a PEG basis) to buy shares in Nike -- just because Nike collects on its bills four days faster than does Reebok
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Fool contributor Rich Smith has no interest in any of the companies mentioned in this article.
