Economic Sting Could Hit More Firms

While some macroeconomic indicators are pointing to early signs of recovery, many footwear players will be on bankruptcy watch heading into the first quarter of 2010.

“This is going to be a tough holiday, and I think we’ll see some additional bankruptcies after the holidays,” said SportsOneSource analyst Matt Powell, noting that the recession will likely outlast the cash reserves of many companies, particularly smaller brands and retailers. “We’ll continue to see the attrition of the smaller companies. That has had the biggest impact on the industry. As long at the unemployment rate continues to go up, people aren’t going to feel like shopping.”

Among the economic casualties of the past year were Active Ride Shop, Chernin’s Shoe Outlet, CIT Group, Gottschalks, Mary Norton and Penny Loves Kenny.

Powell said he expects to see a new crop of bankruptcy filings in January and February. “Everybody will figure out how to get through Christmas and accumulate as much cash as they can before they file,” he said.

However, Powell said that in many ways this holiday season will be more challenging than last because retailers are working with much leaner inventories and the slash-and-burn markdowns of a year ago won’t be repeated this time around.

“This year, inventories are much more in control and there won’t be the deals that there were a year ago,” he said. “Some consumers are going to say, ‘But last year there were all these deals.’ And they’ll wait for them.”

Titan Industries Inc. CEO Joe Ouaknine agreed that pressures are mounting on both the wholesale and retail sides of the business.

“I could definitely see more people going out of business,” he said. “I’m the eternal optimist, but I don’t like what I’m seeing. My private-label business is getting bigger, but my branded business overall is struggling because there are fewer and fewer [wholesale] customers.”

Ouaknine said shoe manufacturers are going to have an added difficulty next year, as production prices in China rise due to currency valuations. “Prices in China will go up because there is no doubt that the U.S. dollar will be challenged against the Chinese yuan,” he said. “I see this very clearly. We’re not settled.”

Matt Priest, president of the Footwear Distributors and Retailers of America, said the bankruptcy filing of factoring giant CIT Group earlier this month could have a domino effect for independent retailers who can’t secure credit.

“For independents, it could make or break them,” he said. “But it’s hard to paint broad strokes with independents since they are all unique and we don’t know their cash situation.”

Priest added that he is more optimistic about larger vendors and retailers. “I was in China [recently] and for the first time, there was a light at the end of the tunnel and orders were picking up,” he said. “Historically, the week before Christmas is a big week. Even last year we saw growth during this time. If retail trends continue, we’ll see some increase. We’re cautiously optimistic that the thawing has begun.”

 Sam Poser, an analyst at Sterne Agee, agreed that some retailers will make significant gains this holiday, but they’ll do so by taking market share from weaker competitors.

“You will see some people get crushed during the holidays because you’ll see the good [retailers] get really, really good with execution,” he said, noting that Dick’s Sporting Goods, Genesco and Kohl’s could be the big winners this holiday season.

“There is a lot of flux in the market and opportunity,” said Chinese Laundry CEO Bob Goldman. “I go back a lot of years and I’ve seen a lot of shakeouts, and every shake out brings a new breed of retailers. New people will come into [the industry] and others will go away. But that’s just business.”

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