Barington Capital Group, L.P., which represents a group of investors in The Stride Rite Corporation, on Tuesday sent a letter to Stride Rite chairman and CEO David Chamberlain voicing concerns over the number of stock options that have been issued to senior management of the company. Barington stressed in the letter that they see the grants have been “excessive” and have diluted the value of SRRs stock repurchase program, resulting in a negative impact to shareholder value.
The letter as released by Barington:
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
