Anxiety Over Europe Intensifies

Anxiety Over Europe Intensifies
A Berlin retailer goes on sale.

NEW YORK — Europe’s struggling economy could have a significant impact on some brands in the back half, industry insiders told Footwear News.

“Everyone is down more than what they thought,” said John McCarvel, president and CEO of Crocs Inc., which reported in its second-quarter earnings call with investors that its Europe backlog was off 11 percent.

McCarvel added, “[At the end of the day], people are worried about jobs. For us, we are counterbalancing that a little bit by opening stores, sharing the wide portfolio of products that we have and getting new consumers [to] consider us. In Germany, France and Spain, the general feeling has been good, but [it’s] not enough to offset what is a more macroeconomic situation. ”

Just last month, VF Corp. announced a new plan to more than double its Asia-Pacific revenue to $2 billion by 2017, after CEO Eric Wiseman told analysts on its second-quarter call “there is no doubt that conditions [in Europe] have weakened since last year, which is why we planned for lower growth this year.”

Wolverine World Wide Inc. also lowered its third-quarter guidance, citing a more challenging environment in Europe as its revenues in the region — which contribute a quarter of total group sales — are down double-digits quarter-to-date.

Donald Grimes, Wolverine’s SVP and CFO, said, “It’s been a combination of tough economic conditions as well as… a negative [effect from the Olympics when] about 1.5 million people left Central London and the tourists who were there weren’t buying shoes. The weather has not been conducive in a broader European market [either].”

Wolverine CEO Blake Krueger added, “We had thought that the footwear business in that region was on a choppy bottom a little bit. But frankly, it went down a level the last seven or eight weeks. Most of July, the latter part of July and in August, we saw softening in footwear across a number of different markets.”

Camilo Lyon, analyst at Canaccord Genuity, affirmed that the general retail landscape in the region has not been rosy.

“European retailers have anticipated a tougher winter season from a macro perspective and gotten more conservative as the year has progressed. They’re not canceling orders but they’re prolonging deliveries as much as possible to wait until demand materializes, so as to take on as little inventory risk as possible,” Lyon said.

While high-end footwear sales have remained strong, the broader luxury sector has slowed slightly in Europe. Burberry, which reports its second-quarter results on Oct. 11, last month unexpectedly pre-announced a sharp deterioration in retail comps in the first 10 weeks of the quarter.

What that means for the market, said Citi Investment Research analyst Thomas Chauvet, is “investors remain concerned about the greater cyclicality in a deteriorating macroeconomic environment in Europe. The deceleration [seems to be] broad-based across Burberry’s key markets [including] Europe. Its superior sales, earnings growth profile, margin expansion potential and transformational changes to the organization have now disappeared.”

Of course, some firms are thriving despite the unusual weather patterns and slump in consumer confidence.

Prada is seeing continued strength having recently reported a 59.5 percent jump in first-half net income to 286.4 million euros, or $372.3 million.

Donatello Galli, the firm’s administration and finance director, told analysts last week, “There are political problems around the world, but there is not an absolute slowdown. August numbers were in line with the first six months. We are not so pessimistic.”

Adidas AG is seeing mid-single-digit sales increases in Western Europe, which led the firm to increase its profit forecast for the year to 15 percent to 17 percent, reaching between 770 million euros and 785 million euros, or $1 billion and $1.02 billion at current exchange.

And Nike Inc., despite a poor performance in China, saw revenue in Western Europe rise 6 percent in its recently concluded first quarter.

“It’s the strength of the athletic cycle champing at the bit of the macro headwinds,” said Lyon. “The futures numbers out of Europe for Nike, which are up 6 percent, are the best indicator of demand.”

Kate McShane, analyst at Citi Investment Research, noted that brands that are less mature will fare better in this climate.

“Wolverine … is more mature relative to VF, so the incremental market share growth opportunity for [Wolverine’s brands] are not as great. That’s really the only difference,” she said.

But at the end of the day, firms will fare differently based on their exposure to the region and how realistically they plan their business.

McShane noted, “If you have a big business in Italy or Spain, you’re in trouble because there are all specialty shops there instead of a big, healthy department store without a credit issue.”

But in the end, some observers said it comes down to specific strategies. Sam Poser, analyst at Sterne Agee, noted, “Regardless of where the economy is, this is about how well you fight it.”