Unscrambling Monday's Egg

Unscrambling Riddell Sports, Inc (Amex: RDL)

Putting Riddell Sports through the Chicks' Dozen
by Chick Kristin

Calling all Roosters! The Chicks are here to set the record straight: we know more about the upcoming Super Bowl than you think. It's not just the new commercials or football players' tight cabooses we've got on our minds, really! It's the possibility of future investments that grabs attention in the Hen House.

In fact, I've got a riddle for you. Do you know who manufactures the official helmets for the National Football, Canadian Football and Arena Leagues? OK, so you read the title, and you've guessed it: Riddell Sports Inc. (Amex: RDL). But I'll bet you didn't know that Riddell outfits both sides of the sidelines with its other brands; MacGregor, Umbro and Varsity Spirit. Study this piece to see if Riddell's got its X's and O's lined up for a Chick investment score.

1. Buy What You Know   I love football, but the closest I've come to playing it is in the backyard. I do watch pro football every weekend with my hubby. And the one name that inevitably catches my attention is Riddell. I also love a good soccer, or "football," match as they say in the UK, and Umbro is the brand of choice, so Riddell gets the first down conversion for this criterion.

2. K.I.S.S.   Football is an American tradition, and soccer is an international one. If I were to ask any fifth grader about football or soccer, they would not only be able to explain the game, but I am positive they would have a list of their favorite players or teams. Score two points for RDL because they've safely passed the Keep It Simple trial.

3. Industry   Riddell Sports, Inc. competes with other sporting goods manufacturers, primarily NIKE and Rawlings. RDL has worked itself into other markets in order to increase revenue and ensure a younger, more diverse marketspace. In addition to producing safe football equipment, Riddel operates cheerleader and dance team camps in the United States. Moreover, Riddell ventured into the private dance studio market, too, by operating weekend dance conventions. So, RDL will have other ventures on which to rely for revenue. Field goal through the uprights for Riddell.

4. Leader in its Field  Although, as you'll see soon enough, RDL's numbers don't show it, it is the Top Dog. No other manufacturer can boast that it makes more helmets, or reconditions more equipment than Riddell Sports, Inc. And if you peruse RDL's website, www.riddell1.com, you will see that Riddell strictly adheres to all standards implemented by the National Operating Committee on Standards for Athletic Equipment (NOCSAE) for both new and reconditioned equipment. However if you were to ask Joe Rodriguez about the quality of Riddell equipment, you might hear a different story. About five years ago, Joe fell into a coma after he hit the ground during a scrimmage. The jury in the U.S. District Court, Southern District of Texas, Brownsville, awarded $9.9 million to the now speech-impeded, paralyzed Rodriguez. The jury awarded an additional $1.54 million to Joe's mother for emotional damages. Riddell claimed the injury resulted from a previously existing brain affliction. Consider RDL's field goal blocked for this criterion.

5. Repeat Profitability   Riddell Sports Inc. can sell helmets, factory direct, all over the world. Prices are reasonable and RDL offers group discounts for volume purchases. Boys will be men will play football. And girls and boys, men and women alike, will play soccer long into their golden years, so the opportunity to increase repeat purchases exists. First Down for RDL.

NOTE: All numbers used in the following figures represent millions of dollars.

6. Gross Margin

Use the Gross Margin formula: (Revenue - Cost of Revenue) / Revenue.

For quarter ending September 2000:

88.2 - 52.5 / 88.2 = .40476, or 40.48%.

This falls short of the Chicks 50% requirement -- attempt no good.

7. Net Margin

Using the Net Margin formula, Net Income / Sales (Revenue), we have:

10.1 / 88.2 = .1145, or 11.45%.

Score another point for RDL. This exceeds the Chicks' desired 8% Net Margin requirement.

8. Cash Greater than Long Term Debt

Compare cash to long-term debt on RDL's balance sheet.

Cash = 1.6

Long Term Debt = 150.3

OUCH! Riddell Sports Inc. has huge amounts of debts accredited to its recent plunge into website development. Check out www.varsity.com. You'll see its fancy message boards haven't been used.

9. Flow Ratio

Using the Flow Ratio formula,

(Current Assets - Cash) / (Current Liabilities - Short  Term Debt), we have:

106.7 - 1.6 / 30.7 - 0 = 3.42

Double OUCH! The Chicks look for companies who make more cash than they spend. RDL's not that company.

10. Increasing Growth   For quarter ending September 1999, RDL's revenue was $0.4 million. In September 2000 RDL earned $1.6 million. Yup, sales increased. RDL attributes this to its collectable helmets product line. RDL scores with the Chicks here.

11. Strong Management and Operating History   If you read Riddell's website, you'll see the company has been around the field and then some. If you dig deeper, you'll see its Chairman, Robert E. Nederlander, has been busy on the sidelines. Chairman since 1988, Nederlander owns and operates one of the world's largest theater chains. He was a managing general partner for the New York Yankees from 1990 - 91, but as Director for Cendant, he's currently being sued for accounting fraud along with some of his other business associates, according to the Wall Street Journal. Infer from that what you want; the suit is still pending litigation.

12. Buy on Sale   Attention Shoppers, we've got a blue light special. RDL's 52-week high was $5.38. It's 52-week low was $2. It's average is then, ($5.38 + $2) / 2, which equals $3.69. At the time of writing, RDL's recent price was $3.06.

So football fans, investors alike, RDL was fun to look at, but it doesn't meet the Chicks Dozen criteria. We'll give Riddell time to regroup and improve its X's and O's, and look at it again before Super Bowl XXXVI Enjoy those commercials, and right, the Super Bowl too. Go Vikings! (That was my jab for Chick Julie.)