What's wrong with this picture?

• Author: Bailey, David
• Position: American Studios Inc.

Nothing, say the founders of American Studios, who are trying to get investors to focus on the fundamentals.

Stellar" is how The Wall Street Journal described American Studios Inc.'s stock performance six months after its initial public offering last September. But Randy Bates, Kent smith and Norman Swenson Jr. were the real stars of the Charlotte-based company, which snaps portraits in more than 1,500 Wal-Mart stores.

After building sales to $31.7 million in 1990, they first took $14.8 million out of the company in a leveraged buyout in 1991. Then, following the '92 IPO (in which they sold no stock), they netted $16.9 million in a secondary offering this March, selling 1.1 million shares that cost them 6 cents each.

"There's no question that the three founders of this company have been fortunate," says Smith, the company's president. "We've been blessed in a lot of ways."

But before they could finish counting their blessings, the founders looked on while American Studios' image went out of focus. In mid-May, when the company announced that earnings would fall short of analysts' expectations, the stock dropped from $13.75 to a low of $6 in July.

Smith and Bates pooh-poohed the slowdown in portrait sales that occasioned the announcement as "a hiccup." Wall Street diagnosed it differently. "It was like leprosy," Smith said afterward.

First, angry investors grilled smith and Bates at the annual meeting. Then, a shareholder sued, saying the founders hyped prospects and used misleading information to sell their shares. "We didn't have a phantom of an idea that the reaction would be as severe as it was," Smith says.

The question everyone was asking about American Studios: What's wrong with this picture? "We're a new public company," Smith says," and we're certainly learning as we proceed."

Analysts, who are still optimistic about any company so closely tied to Wal-Mart, predict the stock can get back into double digits -- provided American Studios delivers. "How investors will look at us in the future will depend on how we rebound from this situation," Smith admits.

"They're all very smart, but they didn't come up with anything new," says Dennis McGarry, an executive vice president at Charlotte-based PCA International Inc. from 1970 to 1981. "They made what worked well at PCA in the early years work even better."

Formed in 1967, PCA pioneered the concept of high-volume, low-price portraits aimed at parents of preschool children. All three of American Studios' founders worked at PCA in the '70s, when the merchandiser of photographic memories for the masses was just hitting its stride.

Smith, 44, grew up in Pilot Moutain, where his father owned three Exxon stations and his mother was a housewife. After trying Catawba College in Salisbury and then a motel job, he went to work for PCA in 1970 as a traveling photographer covering the Carolinas, Virginia, Georgia and Alabama. "Photography is really the only thing I've ever done," he says.

Typically, a photographer spends about five days a month at a store, drawing customers with ads promising portraits at an incredible price -- 88 cents for a single shot. Along with the two or three poses included in the advertised special, the photographer snaps a few more than parents rarely resist.

Sometimes, Smith says, he'd shoot 100 kids a day, three poses each. That averages out to six minutes a session, two minutes per shot, including setup, primping, wrestling with biting brats and bawling babies and checkout. "The job of the photographer is extremely stressful and requires a great amount of patience," he says. That was a lesson that would later help him earn millions.

A salesman returns to the store two or three weeks after the photographer to sell the entire package, or at least a goodly portion of the poses not included in the sale price. That's the job Randy Bates, now chairman and CEO of...