Analysts: Opportunity Knocks in 2010

Wall Street is banking on a brighter year.

A month into 2010, market watchers are brimming with hope that an improved economy will bring positive change — and, most important, growth — to the retail and footwear markets. Even so, there is hesitation that the economic comeback won’t be entirely smooth.

“We’re going to have tremendous volatility this year,” said Jeff Van Sinderen, an analyst at B. Riley & Co. “Businesses are going to be spotty: strong at times and weak at times.”
Most Wall Street insiders predict a resurgence in mergers-and-acquisitions activity and an uptick in consumer spending, with the caveat that shoppers are seeking value more than ever. And store experience will become an even bigger factor in attracting shoppers this year, many said.

Here, key analysts, consultants and investment bankers weigh in on what they’re watching the most in 2010.

Bill Mayer
Head of commercial and retail finance group, Wells Fargo Capital Finance
“[This] will be the year for the customer to return to the stores,” said Mayer. “[They will be] drawn by even more value — even at the higher end — and a more memorable customer experience being delivered by retailers.” Brick-and-mortar stores, he added, will need to pay more attention to their in-store atmosphere to compete with Internet players.

“Retailers have done a terrific job improving operations, becoming more efficient, managing inventories and closing unprofitable operations,” said Mayer. “It’s now time to invest similar time, energy and capital into improving the customer experience.”

From a financing perspective, the banker said, “Liquidity has begun creeping back into the capital markets. Banks like Wells Fargo are lending money, and the high-yield markets are increasing in activity. Retailers who have done the right things should be able to access this liquidity to invest in their stores and perhaps acquire a concept to help grow or make their existing concept better.”

Scott Krasik
Senior analyst, C.L. King & Associates

“It will be the year for taking advantage of opportunities,” said Krasik. “By that, I mean companies that have the balance sheets to do acquisitions [should] do them, and stores that can open and take advantage of cheap rents, can do it.”

On the acquisitions front, many brands are struggling, said Krasik. “There’s market share to be taken. It’s a very opportune year for companies that want to solidify their competitive position.”

Top stock picks: Skechers USA and Steven Madden Ltd. “Both of them are set up to have a very strong first quarter of 2010,” Krasik said. “From a fashion perspective and from [the retailers] they’re selling to, both are well positioned for the next couple quarters.”

Gilbert Harrison
Chairman, Financo Inc.

“We’re extremely optimistic about the forecast for this coming year. People feel better about themselves,” said Harrison. “The consumer mindset is extremely positive, and they want to buy and will come back into the marketplace.”

He noted that some firms are rehiring after previously reducing expenses, but that “most are finding out that you can be lean and mean. That’s the one danger with all the cutbacks that have taken place — many people feel they don’t necessarily need to start respending again.”

Jeff Van Sinderen
Senior analyst, B. Riley & Co.

This year will be “a roller coaster,” predicted Van Sinderen. “We’re going to have tremendous volatility this year. Businesses are going to be spotty: strong at times and weak at times. And there’s going to be a lot of head-faking. We’re not 100 percent out of the woods yet in terms of the macroeconomic picture. It remains to be seen how this whole situation will play out. We’ve never been in this situation in recent history.”

Top stock pick: Finish Line Inc. “Whether the macro picture gets better or not, Finish Line is in great shape to improve its gross margins just by closing underperforming stores or striking better occupancy rates with upcoming lease renewals,” said Van Sinderen. He noted that the retailer has improved its merchandise mix and beefed up management of “every component of their business.”

 

Top stock pick: Steven Madden Inc. Citing management’s “incredible job running the company,” Van Sinderen said Steven Madden “has tremendous momentum.” Even though the stock popped 16 percent in the last month of 2009, “It’s going to be a good stock,” the analyst said. “The product is doing extremely well at retail. If you’re a retailer, all you have to go on is the product you have in your stores right now,” and because of Madden’s short lead-time requirements, it is flexible enough to fill orders quickly.

Brian Tascher
Investment banker, BB&T Capital Markets

“2010 will be the year for M&A activity to pick up, particularly for healthy target companies,” said Tascher. He noted that though the financing market is “still difficult,” it is “regaining its footing, and value expectations between sellers and buyers are narrowing.” Still, Tascher said, company managements need to show growth as shoppers start to return to stores. “Accordingly, acquisition growth and market share gains are the principal focus areas for many managers.”

R.J. Hottovy
Equity analyst, Morningstar

“It’s going to be the year for affordable fashion,” Hottovy said.

Top stock pick: Collective Brands Inc. “They continue to be the dominant force in children’s footwear,” said Hottovy. With the economy seemingly improving, the children’s business stands to pick up because of its generally cyclical nature, the analyst predicted.

Watching: Under Armour Inc. Despite the stock’s 23 percent decline in the month following the firm’s announcement during its third-quarter earnings report that footwear revenues are not expected to grow in 2010, Hottovy suspects that Under Armour’s footwear business could still pick up. “I haven’t talked to an analyst who covers them who thinks they’re going to be flat on footwear in 2010,” he said.

Sara Hasan
Assistant VP of research, McAdams Wright Ragen

Hasan is hopeful that 2010 is the year “retailers will be a little less cautious with inventories. A lot of things were out of stock for the holidays. It would be great to see, especially for the manufacturers, who could use a channel refill.” The analyst expects that following the solid holiday sales, retailers are likely “feeling pretty darn good about how well they’ve managed and how they’ve been able to hold their margins.” Therefore, Hasan expects a slow build of inventories over the year, but she doesn’t think “anyone will go crazy” filling the space, either.

Top stock pick: LaCrosse Footwear Inc. The firm earlier this month pre-announced fourth-quarter net sales of $42.5 million, a 21 percent year-over-year increase.

“They were able to pull in some market share, in part because retailers have been so lean on inventory, and a lot of their competitors were also very lean. They were able to fulfill some of the demand as the quarter went on,” said Hasan. She also noted that LaCrosse’s infrastructure improvements over the last couple of years should set the firm up to take advantage of improving business trends this year.

Lawrence Siff
Principal managing director, Gordon Brothers Group

In 2010, “M&A activity will pick up, but will be driven by strategic buyers who have access to the capital,” said Siff. Many companies have copious amounts of cash on their balance sheets, due, in part, to significant cuts in operating expenses, and they are likely gearing up to put that cash to use, potentially motivated by better-than-expected holiday season revenues, he said. The investment banker also predicted an increase in hostile deal activity. On the flip side, financial buyers will not be as present this year, mainly because they have less access to debt.

Siff added that retailers are particularly attractive to buyers now because of the work most did last year to regulate inventories. “In 2009, retailers did a much better job of maintaining gross profit dollars by making sure inventory was more in line with what they needed,” he said. “They also had reduced promotions [in favor of targeting existing customers.”

Sam Poser
Senior research analyst, Sterne Agee

This year will be the time for “revenue growth independent of any recovery in consumer spending,” said Poser. The analyst plans to focus his coverage in 2010 on companies “that are share growers, beneficiaries of competitive rationalization, vendors in the midst of retail expansion, acquisitors and/or [those that] have leverage to [go into] emerging markets.”

Top stock pick: Skechers USA Inc. Poser highlighted Skechers’ success so far with its toning product, a “resurgent” children’s business and its solid international growth. “Shape-ups are one of only a few truly different inspirational products in the marketplace, and sales growth of the product has been parabolic,” he said. Given that inventories are down about 23 percent year-over-year at the end of the third quarter, gross margins “should approach all-time highs.”

Mary Delk
National leader in the retail insights and analytics practice, Deloitte Consulting

This “will be the year of retailers focusing back again on growth and customers,” Delk said. “What they’ve seen over the last 15 to 16 months is that they have to be more intelligent about knowing who this customer is.”

One way to connect with those shoppers is to explore social media, Delk said, because it is a way to know what consumers say about a company. “It’s looking for ways [companies can] create social media strategies in their marketing plans and being more understanding of what the customer is talking about when they talk about their brand.”

 

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