Forecasting the Economy

Forecasting the Economy
Stock are rising and unemployment is falling, but footwear execs still worry about the economy.

A resurging stock market, coupled with the payroll tax cut and extension of the Bush-era tax cuts that both passed in December, are helping Americans and domestic businesses feel a bit better about the economy.

Though few experts predict a return to the boom-boom days of the mid-2000s, recent evidence suggests the footwear industry should prepare for slow, steady gains this year.

The Congressional Budget Office predicted that gross domestic product, a measure of goods and services produced in the country, will grow 3.5 percent in 2011. And recent employment numbers, though still high, have improved.

Bob Campbell, founder and CEO of BBC International, said he is optimistic. “There are definite signs of encouragement,” he said. “Consumer confidence is getting better, and I feel pretty good about [2011].”

Many footwear players expect that sales for the industry will outpace the broader economy, just as they did through most of 2010.

“We’ll see moderate single-digit growth moving forward in 2011,” said Matt Priest, president of the Footwear Distributors & Retailers of America. “We saw growth in 2010 and we’ll continue to build on that. As we saw in 2010, consumers will continue to be smart about their spending. There will be some trepidation in certain segments, but there will be some growth and success, too, and footwear will be one of those.”

Nate Herman, VP of international trade at the American Apparel & Footwear Association, predicted that as shoppers’ moods brighten, footwear could be a big beneficiary of that change in outlook.

“Consumers are not feeling comfortable, but they are compared with a year ago or even six months ago,” he said. “Footwear sales numbers reflect that.”

Still, given the millions of out-of-work Americans, the economy has yet to find solid footing, experts said. The sustained, high unemployment rate shows little chance of declining significantly in the near future. The Bureau of Labor Statistics reported that for the month of December the unemployment rate fell slightly to 9.1 percent, nationally.

And Federal Reserve Chairman Ben Bernanke didn’t offer much optimism when he testified before the Senate Budget Committee early last month. “It could take four to five more years for the job market to normalize fully,” he said.

Speaking about the current rate of new hires, Bernanke added: “If we continue at this pace, we’re not going to see sustained declines in the unemployment rate.”

For AAFA’s Herman, that’s worrisome news since, as he sees it, unemployment and footwear are intimately linked. “The unemployment numbers are definitely not good,” he said. “[Unemployment figures and shoe sales] are fairly closely tied. We’re seeing a very modest recovery, so we’ll see only a very modest recovery in footwear sales.”

John Florsheim, president and COO of Weyco Group Inc., agreed, adding that until unemployment falls in a major way, consumers are going to be reluctant to spend freely. “You really need to see a number of months of forward momentum [in job creation],” he said. “If we don’t get that, it’s going to affect consumer confidence.”

American Sporting Goods Inc. CEO Jerry Turner said he too was worried about the jobless picture. “It’s scary,” he said. “Anybody who is a student of business and a student of America who isn’t distressed isn’t paying attention. The unemployment rate seems to be unfixable by either political party. No one seems to have the willpower to make the correct moves.”

Making matters worse, he said, is the increasing pressure on individual state governments to balance their budgets and make serious and deep cuts.

“Private enterprise may employ more people in the coming year, but there will be tremendous pressure on the [state] governments to reduce their payrolls,” said Turner. “If they don’t, then the states will go bankrupt. There aren’t a lot of choices, and none of [the ones they have] are pleasant.”

Regardless, footwear executives said they anticipate growth for the year, whether due to an improved economic outlook among some consumers, or the fact that people simply need to replace their footwear.

In fact, Campbell said, he’s preparing for

7 percent to 10 percent growth in 2011. Campbell, who acknowledged there are difficult areas of the economy, noted there is still room to build well-priced, quality brands.

“Overall, where you have strong brands and great pricing, you’ll do well,” he said. “It’s not so much about the economy but how you work it. There are stars out there — just look at Ugg. Customers still want what they see as good and hot product, if it is marketed in the right way.”

Michael Katz, president of Matisse, said 2010 was such a strong year for the firm that it will be difficult to maintain its current growth rate. “We had a big year last year,” he said. “We went from $24 million to $30 million. We’ve been growing for 10 years, and every year has been better than the prior year. At some point, you just can’t keep growing at that rate. So I’m projecting we’ll grow about 15 percent.”

At American Sporting Goods, Turner, too, is coming off a blockbuster year, thanks to the company’s success in the toning category, which helped propel sales nearly 40 percent. But with demand for toning shoes leveling off, Turner said he’s setting his sights lower. “If we can achieve high single digits, we’ll be very pleased,” he said.

K-Swiss Inc. CEO Steven Nichols is also banking on an active year because of the success of its Tubes product and running program. “When we reported [our earnings] in November, we said our futures orders for the first quarter were up 86 percent, so we are anticipating a strong 2011,” he said.

However, Nichols said his optimism stems from the company’s internal achievements, as opposed to macroeconomic factors. “We’re not a big enough company where we’re going to move in lock step with the economy,” he said. “We influence our destiny by ourselves. We can do bad in good times and we can do good in bad times.”

One issue sure to dampen executives’ moods is the escalating cost of doing business in China, and the uncertainty it is creating for both prices and availability.

“We’re expecting [footwear] prices to rise in 2011, in large part due to rising material costs,” said Herman. “That’s going to be hard to sell to the consumers in this economy, but there isn’t a whole lot of choice right now because margins are being squeezed so badly.”

“[Sourcing issues] will affect 2011 and the economics of the shoe industry more than anything else,” said Nichols. “There probably will be price increases, and there probably will be shortages. It will be a very tricky year.”

While admitting sourcing was cause for concern, Katz said he was confident his company could offset any price increases in China with better deals in the other countries where Matisse manufactures shoes. “China is just one place where we produce,” he said. “When we get hurt there, we’ll be helped somewhere else, like Brazil.”

Katz also offered reassuring words to calm the industry’s worriers: “This is certainly an industry concern that everybody is voicing, but I hear this every year and every year it works itself out,” he said. “We’ll be OK.”

FDRA’s Priest agreed that footwear executives are well equipped to cope with whatever lies ahead. “It might not be easy, but footwear companies are better prepared than they ever have been to take on these challenges,” he said. “They’re ready for it.”

 

Source: The Financial Forecast Center

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