Barington Capital Group Sends Letter to the Chairman and CEO of The Stride Rite Corporation
April 19 2005 - 11:28AM
PR Newswire (US)
Barington Capital Group Sends Letter to the Chairman and CEO of The
Stride Rite Corporation Expresses Concern with Level of Stock
Option Issuances NEW YORK, April 19 /PRNewswire/ -- Barington
Capital Group, L.P. sent the following letter to the Chairman and
CEO of The Stride Rite Corporation (NYSE:SRR) today: April 19, 2005
Mr. David Chamberlain Chairman and Chief Executive Officer The
Stride Rite Corporation 191 Spring Street Lexington, Massachusetts
02420 Dear David: Barington Capital Group, L.P. represents a group
of investors in The Stride Rite Corporation ("The Company"). As one
of your larger shareholders, we are becoming increasingly concerned
with the level of stock options that have been issued by the
Company. It appears to us that these grants have been excessive and
have materially diluted the benefits of the Company's stock
repurchase program -- the combination of which has negatively
impacted shareholder value. As you know, at the Company's 2001
annual meeting, shareholders approved the 2001 Stock Option and
Incentive Plan (the "Plan") which provided for the issuance of up
to three million new equity grants to management, representing in
excess of 7% of the Company's outstanding shares at that time.
Three years later, on account of the Plan being nearly exhausted,
shareholders approved an amendment to the Plan which provided for
the issuance of an additional three million new equity grants,
representing in excess of 7.5% of the Company's outstanding shares
at that time. On October 22, 2004, in a letter to you, we expressed
our hope that the Company would be prudent in the issuance of new
stock options under the Plan amendment. So far, it appears that
this has not been the case. During fiscal year 2004, the Board
granted 804,090 stock options (according to the Company's latest
Form 10-K dated December 3, 2004), and in January 2005, the Board
granted an additional 742,000 stock options and restricted shares,
mostly to its senior executives (according to its Form 8-K dated
January 18, 2005). These recent grants have apparently already
consumed more than 25% of the three million additional shares that
were authorized by the Plan amendment. During the past three fiscal
years, the Board has granted a total of 3.1 million stock options
(according to the Company's latest Form 10-K). Over this time
period, the Company has had an average "burn rate," calculated as
options granted in a fiscal year divided by shares outstanding, of
approximately 2.6% -- a sizable number. Commenting on Stride Rite's
burn rate in its Proxy Paper dated February 27, 2004, proxy advisor
Glass, Lewis & Co. stated " ... that is a lot of dilution for
the shareholders to accept ... By our calculations, the Company has
been granting options at a brisk pace and one that does not satisfy
us that shareholder interests are being carefully considered."
Institutional Shareholder Services ("ISS") has similarly stated in
its Governance Weekly bulletin dated March 24, 2005 entitled
"Understanding Equity Burn Rates" that average three-year burn
rates greater than 2% would be considered by the proxy advisor to
be excessive. ISS went on to note that institutional investors are
beginning to incorporate burn rates into their proxy voting
guidelines and suggested that other investors may wish to upgrade
their policies to do the same. While we recognize that the
Company's amendment to the Plan was supported by ISS last year, as
noted in its U.S. Proxy Voting Manual, ISS only began considering
the average three-year burn rate of companies in its evaluation of
equity plans this year. In light of this, we wonder whether the
Plan amendment, which doubled the number of shares available for
issuance under the Plan to six million, would receive the approval
of ISS and the Company's shareholders today. As it was, Glass,
Lewis & Co. recommended in its Proxy Paper that shareholders
vote against the Plan amendment and more than 32% of the shares
voted were either voted against or abstained from voting on the
amendment at the Company's 2004 annual meeting. The effect of the
Company's stock option issuances has been to dilute the value of
the stock held by the Company's shareholders, to the benefit of the
Company's management. While we support equity compensation grants
as a means to incent and retain management, we question the
appropriateness of the level of wealth that has been transferred to
management during a time period when Stride Rite's stock price has
materially underperformed its peer group (as evidenced by the stock
performance graph in the Company's 2005 Proxy Statement). The
Company's stock option issuances have also negated the benefits to
shareholders of the Company's stock repurchase program. During the
last five fiscal years, the Company repurchased 10.4 million shares
(according to its Forms 10-K for the fiscal years ended 2000-2004).
During this same time period, however, total shares outstanding
decreased by only 7.3 million shares, leaving a dilution factor of
nearly 3.1 million shares to be absorbed by stockholders. In
addition, while the Company repurchased 432,200 shares during the
first quarter of 2005, shares outstanding actually increased during
the quarter by approximately 54,000 shares (according to the
Company's Form 10-Q filing for the period ended March 4, 2005). It
appears to us that any benefits the Company's stock repurchase
program provides shareholders is being attenuated, as it must also
"mop up" prior equity grants to the Company's management. In our
opinion, the level of equity grants to management has gone too far,
causing us to question whether management's interests are truly
aligned with those of shareholders. Our concerns have been
exacerbated by the recent spate of insider selling that has
occurred since the Company announced fiscal year 2004 results on
January 13, 2005 (in excess of 200,000 shares based on our
calculations). We believe that insider selling at a time when
Stride Rite has yet to demonstrate a turnaround of its Keds brand
and continues to firm up other segments of its business sends a
poor signal to the market concerning management's view of the
Company's long-term prospects. If the Board intends to continue to
"re-load" executive option packages every few years to the
detriment of shareholder value, we suggest that the Board consider
an alternative that would optimize value now for all shareholders,
not just stock option recipients -- put the Company up for sale.
Under the circumstances, we believe that a sale is the best course
to pursue and therefore advocate that the Board promptly consider
this and other similar strategic alternatives to maximize
shareholder value. We would appreciate the opportunity to discuss
our concerns and suggestions with you in greater detail. I will
call your office to schedule a mutually convenient time to speak
with you next week. Sincerely, /s/ James A Mitarotonda James A.
Mitarotonda cc: Christine M. Cournoyer Shira D. Goodman F. Lance
Isham Frank R. Mori James F. Orr III Myles J. Slosberg Bruce Van
Saun About Barington Capital Group, L.P. Barington Capital Group is
an investment management firm that primarily invests in
undervalued, small capitalization companies. Barington and its
principals are experienced value-added investors who have taken
active roles in assisting management teams in creating or improving
shareholder value. CONTACT: Ellen Barry / Robin Gilliland Brunswick
Group (212) 333-3810 DATASOURCE: Barington Capital Group, L.P.
CONTACT: Ellen Barry or Robin Gilliland, both of Brunswick Group,
+1-212-333-3810
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