Candie's Inc.
(Nasdaq: CAND) (N) (S)
Phone: 914-694-8600
Price (3/3/97): $5 3/16

HOW DID IT DOUBLE?

Olivia Newton-John escaped from the late '70s version
of the late '50s (aka Grease)
and magically reappeared as the MTV babe du jour
Jenny McCarthy. And on her feet?
Why Candie's "slides," the kicking ole' mules that once
left John Travolta drooling.

Ok, so I'm fudging a bit. The stock's move in early
January from just above $2 a share
to the recent high of $6 9/16 owed something to the
sense that this long-beleaguered
shoe company run by Kenneth Cole's brother Neil had
finally completed a period of
house-cleaning that began with a 1993 "quasi-reorganization."
The company had swapped debt for equity and was now
ready for serious business once again. By
mid-December, Cole was telling analysts that the company
could do $65 to $75 million
in sales for FY98 ending next January, with margins in the
8% to 10% range -- quite a
leap from the numbers you see below.

The main reason? The once wildly popular slides
(14 million pairs sold in the late '70s
and early '80s) were leading the company's new push to
promote the Candie's brand.
Plus, fashion mavens apparently had been hankering for shoes to
fit the retro look.
Hot-shot designers Betsey Johnson, Anna Sui, Nicole Miller,
and Vivienne Tam had created a designer collection of
slides that was generating enthusiasm from upscale
retailers such as Macy's and Lord & Taylor.

The company also promised a star pitcher. The spring fashion
magazines have featured McCarthy, the new queen of MTV,
looking sexy and everyday in her slides. Plus, TV
Guide recently reported that other celebrities, from Friends
stars Lisa Kudrow and Jennifer Aniston to Party of Five's
Jennifer Love Hewitt, are also Candie's fans.

The stock got a special boost, as well, from a January 9th
meeting between company officials and Dawson-Samberg Asset
Management, Wall Street's version of smart
money. (Last year they were hot on the questionable
DIANA CORP. (NYSE: DNA)(N) (S).) The Wall Street Journal
reported that the meeting was one reason for the
stock's sudden jump to the $4 range. Then the feeding
frenzy was really on.

BUSINESS DESCRIPTION

Based in Purchase, New York, Candie's designs and
markets shoes for women ages
14 to 40. Suppliers in China, Mexico, Italy, Spain,
and Brazil manufacture the shoes.
The company emphasizes casual and fashion footwear in
the $40 to $60 range, a market area somewhere between
Payless and Nine West. The company concentrates
on its own Candie's brand as well as its exclusive
North American license to market
shoes under the Bongo label. Company chief financial officer
(CFO) Gary Klein said
that the Candie's brand should account for 50% to 60%
of sales this year (30% of
which should come from the slides), with Bongo claiming
20% of the sales pie.

Candie's also acts as a buying agent for discount
retailers, serving as Wal-Mart's largest
supplier of men's workboots. Workboots, hiking boots,
and men's leisure shoes are
sold under retailers' private label names or under the
Aspen name, a brand Candie's has
licensed. Sales and commissions from these operations
should account for about 10%
of total revenues this year.

The company has also opted out of a licensing deal in
order to start a new kids division
for both Candie's and Bongo. Klein said the company would
continue to capitalize on
these brands through licensing deals when appropriate.
Candie's currently operates one
retail store in White Plains, New York, and intends to
open 2 to 3 others this year, with
a long-term goal of about 100 stores.

FINANCIAL FACTS

Income Statement
12-month sales: $39.98 million
12-month income: $0.18 million
12-month EPS: $0.02
Profit Margin: 0.0045%
Market Cap: $51.88 million*

Balance Sheet
Cash: $0.325 million
Working Capital: $1.29 million
Long-term Debt: $0.12 million

Ratios
Price-to-earnings: 259
Price-to-sales: 1.3*
(* assumes only 10 million shares outstanding)

COULD THIS DOUBLE HAVE BEEN PREDICTED?

Prior to the Journal's story on January 10th, it
would have been hard to predict the
stock's recent rise. Sales have grown slightly, but
earnings are still lagging. The Candie's
brand remains well recognized, which might have induced
a Fool to check out what was
happening at the company. On the other hand,
searching for turnarounds among penny
stocks can be a depressing hobby. Besides, the apparent
revival of the slide -- as well
as the runaway success of Ms. McCarthy -- is an inscrutable
matter best left to the gods.

WHERE TO FROM HERE?

Perhaps there's a reason that no analyst covers Candie's.
For one thing, the company
doesn't have a convincing track record. It may have
turned its business around and the
slides product may prove a hit, but there's no great
reason to believe Candie's can grow
sales by 51% to 74% over the $43 million in revenues
the company expects to register in FY97.

Then again, fashion is unpredictable, and a hot
spring could completely jump-start the
company's prospects. CFO Klein said that the company's
backlog is running dramatically above year-ago figures,
and the company is ready to meet even very strong
demand.

Assuming the company delivers, investors still face two
enormous question marks: the
tax rate and dilution. The company's tax rate has
hovered around 10% of late. Yet
Candie's only has $8 to $10 million of carry-forward
losses left to claim between
Candie's Inc. and the Bongo-associated company International
Trading Group. Klein
said that 20% would be a "conservative" tax rate
for this year.

If Candie's hits management's own high side estimates of $75
million in revenues and
10% pre-tax margins in FY98, the company could turn in $7.5
million net income before taxes. If the company grows
at a less dramatic but still manic pace to $65 million
in revenues and hits the 8% margin target, net income
before taxes would stand at $5.2 million.

Run these numbers through the "conservative" 20% tax
rate, and you're looking at a
rough net income guestimate of $4.2 million to $6.1
million for FY98. Based on the
current figure of 10 million shares outstanding,
earnings per share (EPS) would fall in the
$0.42 to $0.61 range, making Candie's shares look
potentially inexpensive.

But -- and this is a huge but -- the company has
millions of shares tied to options and
warrants that should hit the market sometime this year,
particularly if the company is
successful. Assuming full dilution (roughly 18 million
shares), the EPS numbers do some
sliding of their own to the $0.23 to $0.34 range.
Based on the recent share price of $5
3/16 a share, this means Candie's now trades at a forward
price-to-earnings ratio
between 15.25 and 22.5. Find the middle of that range,
and you're looking at the
average forward PE of the giants in the S&P 500.

For that price, Candie's offers potentially superior
growth prospects but considerably
more risk. Call me a Fool, but I'd like to see
the financials rise to meet the stock a bit
before sinking my teeth into these shares.

-Louis Corrigan (RgeSeymour)

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