Stocking Up: Analysts Sound off on 2011

Stocking Up: Analysts Sound off on
After a healthy year for footwear shares, market watchers expect more in 2011, although at a lesser pace.

NEW YORK — Footwear stocks outpaced the market in 2010, and analysts said this year will see the industry continue its upward trajectory, albeit at a slower clip.

“Footwear was a standout category both for low- and high-end retailers in 2010, and I don’t expect that trend to change in 2011,” said Scott Krasik, analyst at BB&T Capital Markets.

According to data from Yahoo Finance and compiled by Footwear News, 33 of 39 companies tracked saw their share prices end the year higher.

As an industry, this basket of stocks outperformed market indices, rising an average of 35.2 percent, and a median of 33.3 percent, between the first and last trading days of 2010.

In comparison, the S&P 500 rose 12.8 percent over the year, while the Dow Jones Industrial Average closed up 7.8 points, up 11 percent from where it began 2010.

The top five gainers in the industry were Crocs Inc., Deckers Outdoor Corp., Under Armour Inc., Foot Locker Inc. and Hibbett Sports Inc.

Crocs’ stock more than doubled in the 12 months ended Dec. 31, 2010, starting at $6.35 and ending at $17.12, as the company returned to growth and announced a plan to hit $1 billion in annual sales.

Shares of Deckers also soared, increasing 122.6 percent to finish at $79.74.

“[Deckers] did a good job expanding the Ugg assortment to the point where ‘classic’ now includes the whole knit line. It was important to push forward beyond that,” said Krasik. “The other thing that helped their stock was that they vocalized the international opportunity for the brand. Even if the U.S. market is maturing, the brand can have a second life internationally.”

Under Armour gained 89.6 percent during 2010, while Foot Locker surged 71.1 percent and Hibbett Sports capped the year up 63.4 percent.

Meanwhile, six footwear stocks ended the year lower than where they started, including Skechers USA Inc., The Jones Group Inc. and Collective Brands Inc. Their share prices fell between 5 percent and 32 percent in the year.

Overall, footwear firms’ performance in 2010 was characterized by several positive trends, including top-line growth and cleaner inventories.

“Drivers that helped the top line included selling more higher-price-point goods, with toning being a higher contributor and key growth driver,” said Susquehanna Financial analyst Christopher Svezia.

“Companies also had cleaner inventories and lower occupancy costs as they renegotiated lower leases. All those things together helped drive comps and nice leverage,” he added.

Companies also delivered strong product during the year, said Jeff Van Sinderen, analyst at B. Riley & Co.

“Without the product, forget it. But coupled with customers’ desire to shop, things got better,” he said.

Looking to 2011, analysts said share price growth could come under pressure since many businesses are going up against difficult earnings comparisons and expectations may be hard to beat. Firms also will see the impact of higher supply chain costs and need to focus on driving revenue growth.

“The ones that generally reported better numbers [in 2010] were the ones that gave better discounts,” observed Van Sinderen. “December confirms this to some degree: We’re still in an environment where, for the most part, the consumer is looking for value.”

However, Svezia noted there is room for price increases on product this year, following some initial gains in 2010.

“We’re not in a deflationary environment,” he said. “Everyone is taking pricing up where they can and where it’s appropriate, and newness will translate into a higher average selling price at retail.”

Analysts also added that the categories to watch include fashion — get set for another big boot year — and athletic.

And Krasik said many fashion-forward footwear companies are trying to tailor their collections around new apparel styles.

“For example, Steven Madden Ltd. is excited for pumps and wedges for spring, but for that stuff to really work, you need wider-leg denim to pick up as well,” he explained.

Svezia added that “key categories such as basketball continue to be relevant, with new brands stepping into that space and Adidas and Reebok continuing to do a nice job with it. Strength in running is also broad-based, spanning both fashion and lightweight.”

Ultimately, 2011 will be a year of both continued sales growth and operating margin improvement for companies, said Morningstar Inc. analyst R.J. Hottovy, who predicted that average revenue growth for retailers will be around 4 percent for the year.

However, Hottovy also warned that, given the run-up in 2010, “stocks may disappoint in 2011 due to some really lofty expectations already priced into them.

“A case in point was Nike, which, by all means, reported great futures orders for the most recent quarter, yet it wasn’t enough for the market. Perhaps the market is ahead of itself,” he added.

The experts also cautioned against thinking the rebound in consumer confidence is here to stay, even with recent minor improvements in the unemployment rate.

“We’re still going to have an erratic environment, and that will remain true to some extent. It won’t be completely smooth sailing for at least the first half of the year,” said Van Sinderen.

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