Despite attempts to put its best foot forward, this mature $40 billion industry the once well-heeled, $40 billion footwear industry continues to plod along, growing only 2 to 3 percent each year.
Industry fragmentation means that no one manufacturer dominates the “brown shoe,” or non-athletic footwear, side of the business. While that might signal the sector is ripe for consolidation, few mergers or acquisition have occurred to date, hindered in part by low valuations that make equity offerings difficult.
Analysts said shoemakers shot themselves in the foot several years ago expanded retail outlets faster than the market was growing and loaded up on inventory. Stocks from the publicly traded “white shoe” and “brown shoe” companies floundered.
But analyst Steven Richter said market conditions are improving slightly as footwear giants like Timberland Co. (NYSE: TBL), Vans, Inc. (Nasdaq: VANS), Brown Shoe (NYSE: BWS) and Wolverine World Wide, Inc. (NYSE: WWW) pull themselves up by their boot straps and reduce inventories, change leadership and learn to better manage their brands and their retail channels.
Many footwear companies have exited the manufacturing portion of the business, which has moved overseas. Instead of making shoes, they now focus on marketing and branding.
“It’s not an easy industry,” explained Richter, managing director for Tucker Anthony Capital Markets in Boston. “The lack of real top-line growth makes this a tough area for investors.”
Some companies have managed to build a loyal consumer following that, in turn, has boosted their stock prices.
Analyst Steve Marotta said that brand has a lot to do with success.
“Companies that are delivering more fashion-oriented footwear to the market in a relatively expedient manner are doing better than the ones that are relying on more old-school styling,” said Marotta, vice president of Wasserstein Perella Securities in New York.
“I think, based on the fragmentation of the industry and the fact that some players are performing relatively well, some of these companies have the ability to generate 20 percent growth.”
Fueled by an expansion in the athletic market, many footwear manufacturers enjoyed explosive growth in the late 1980s and early 1990s, Nike (NYSE: NKE) chief among them.
But by the middle of the decade, the market bottomed out. Manufacturers and retailers found themselves with too much inventory and too much square footage.
A number of small retail chains went bankrupt, giants such as Footlocker closed stores, and industry leaders such as Nike and Nine West (NYSE: JNY) stumbled.
“Everyone was going through difficult times,” Richter said. “They had created overstored, overinventoried retail environments, and that caused a ripple effect through the industry.”
The retail side of the industry spent the next few years undergoing a massive consolidation of distribution channels. Manufacturers such as Wolverine, which makes Hush Puppies shoes and Caterpillar boots, virtually exited the retail business.
Richter said that this consolidation created a situation where retailers — department stores, specialty chains and discount channels — have grown dramatically more powerful.
The industry began to stabilize in 1999, and Richter sees a trend toward improvements in 2000 as leading manufacturers become better at leveraging the strength of their brands and managing their retail channels.
Marotta sees the trend in retail swinging back to more manufacturer-owned stores. He points to Genesco (NYSE: GCO) and its incredibly popular Journeys stores.
“As a retailer, one of their very nice attributes is they can react quickly to fashion changes,” said Marotta, who rates the company as a strong buy.
“It’s important to stay close to the consumer; you can use the stores as a test and get a read on what can and can’t work. One of the downsides to being a third party is you don’t control your destiny at all.”
Vans remains the darling of many analysts. The California company designs, markets and sells branded performance footwear for boarders — skate and snow — and wannabee boarders.
Richter rates them a strong buy, noting that the company is a “good example of a real growth story in the business.” He complimented Vans brand management, noting that the company is expanding its brand image by opening skate parks for children and teens.
Research analyst Darren Barker of Wedbush Morgan Securities in Los Angeles also likes Vans and praises its three-tiered approach to distribution.
The company makes a higher price-point, performance-oriented product for hardcore skate shops, as well as shoes that appeal in styling and price to footwear stores and department stores.
He has set a $20 price target for the stock, which currently trades for about $16, in fiscal 2001.
Richter is also bullish on Timberland, a New Hampshire footwear company that specializes in rugged boots and shoes for the entire family.
He called Timberland, whose stock split in July and now trades in the $40-per-share range, one of the “best performing footwear companies out there.”
“Timberland is one of the few growth brands,” Richter said. “They have been extremely successful in introducing product lines for different channels and keeping their brands `clean’ throughout the distribution channels.”
The market hasn’t been as kind to other footwear companies. Wolverine, whose funky, re-energized Hush Puppies made it the darling of Wall Street in the mid-1990s, has watched its share price tumble from a high of $30 per share to the $10 range — even while the Michigan company continued to post record sales and profits.
Although he likes the company, securities analyst Craig Sirois with Value Line in New York rates Wolverine stock as a neutral. He complimented the company’s “deep bench” of management strength, and gives the stock a three- to five-year price target of $25.
“I think they’re coming from a position of strength,” Sirois said. “Their portfolio of brand names is the best that can be found.”
Richter rates Brown Shoe Co. as a stock to accumulate over the long term. He said that Brown Shoe, which owns the Famous Footwear chain of stores, as well as the Buster Brown and Naturalizer labels, has been struggling with some top-line issues in its Famous Footwear division.
Still, he said the company has enacted some positive initiatives, including the appointment of Ronald Fromm as CEO in 1999, to refocus itself.
“This company has changed itself from manufacturing to a retailing and branded company,” Richter said. “They still have improvement to go in re-engineering their top line.”
Sirois rates Brown Shoe as a neutral. While he called Brown a “good company” that’s very aggressive, he said the retail environment is in a “kind of slump” and questions whether Brown should continue opening new retail outlets each month.
He gives a three- to five-year price target on the stock, which currently trades in the $9.50-per-share range, of $32.50.
