Europe Woes Hit Shoe Stocks

NEW YORK — Footwear stocks, which kicked off the year with a bang, are continuing their downward slide in the final days of 2011, due in large part to uncertainty over the European debt crisis.

Still, market watchers said most companies, armed with strong balance sheets, are well positioned to weather the mercurial market in 2012.

One positive factor heading into the new year is that sourcing costs in Asia are moderating, making it easier for companies to boost their bottom lines and, in turn, see their stock prices rise.

“Next year, we’re looking at a huge tailwind, which is arising from moderating input costs,” said Sterne Agee analyst Kenneth Stumphauzer. But, he cautioned, “for the next three months at least, the overriding market direction will be intrinsically tied to Europe.”

While French President Nicolas Sarkozy has said European leaders are doing everything possible to save the euro, they aren’t expected to hammer out the nitty gritty details before March.

Jeff Van Sinderen, an analyst at B. Riley & Co, agreed that the macroeconomic situation will pressure stocks in the near-term, but that the footwear market as a whole should see shares rise as long as the shoe cycle continues to be strong.

This year, the strength in the sector contributed to a healthy rise in footwear stocks during the first half of 2011. But a more erratic pattern emerged in the fall, and many stocks gave up their gains this month.

A basket of 40 firms tracked by Footwear News gained an average of 4.5 percent in the first six months of the year, but slipped an average of 15.2 percent in the latter six months, as of press time.

By year’s end, 17 winners and 23 losers are on track to close with an average loss of about 9.5 percent. (Results were calculated after the market last Wednesday, when the euro sank below $1.30 for the first time since January.)

“It’s been a strange year the way these stocks have traded. It doesn’t make a lot of sense when you look at how consumer confidence has been improving,” said Van Sinderen.

Stumphauzer agreed: “Footwear performed very admirably relative to every other sector in retail, [considering how] this year presented significantly more operational challenges to prior years [in that] firms needed discipline with respect to inventory managemement and the quality of brands dictated how people were able to price their product.”

But while many firms have done an exceptional job of managing the factors they can control, Stumphauzer noted that footwear stocks have a higher beta in general, making them more sensitive to negative headlines and nervous investors.

Indeed, the industry outperformed the benchmark indices at the half-year point, but has since swung to a wider loss. With about 10 more trading days remaining for the year, the S&P 500 has lost 4.7 percent, while the Nasdaq Composite has slipped 5.7 percent.

Other analysts noted that the firms that made acquisitions during the year were standout performers in the stock market because the new businesses are helping fuel expansion beyond the domestic market.

“[Those companies] will continue to do well because of growth through incremental points of distribution, strong management teams and strong product cycles,” said Kate McShane, analyst at Citi Investment Research.

Genesco Inc. was this year’s biggest gainer, having risen 52.6 percent year to date. The firm opened the year at $37.41 a share, but gained strength after it acquired U.K.-based Schuh Group in late June.

In second place is VF Corp., which is up 51 percent year to date after acquiring The Timberland Co. for $2.3 billion in June. It hovered around $130 a share last week.

Firms such as Steven Madden Ltd. and Nordstrom Inc. also completed acquisitions during the year, leading to a faster rate of topline growth and subsequent buy ratings from analysts.

Other investor favorites, such Foot Locker Inc. and Finish Line Inc., are on track to finish the year up about 20 percent and 14 percent, respectively.

“Foot Locker was specifically a turnaround story that exceeded even very aggressive management targets, while Finish Line continued to improve its operating profit, which was already at peak levels,” said McShane, adding that Foot Locker plans to announce a new strategy and set new targets in the spring, which should excite the market further.

But other companies were hit by lackluster results. While the market winners saw a median gain of 14.4 percent, the losers recorded a median decline of 23.4 percent.

Two firms that have struggled with profitability and are undergoing portfolio review — Collective Brands Inc. and Brown Shoe Co. — are about 40 percent lower now than when the year began.

Crocs Inc., the top gainer at the year’s mid-point, will end the year roughly 18 percent down after lowering guidance in the third quarter and sending investors into a tailspin.

K-Swiss Inc., one of just a few firms in the red, is at the bottom of the list after seeing about 78 percent of its market cap wiped out year to date.

In the end, opportunities abound for investors looking to buy on recent weakness, analysts said.

Jim Duffy, an analyst at Stifel Nicolaus, said Crocs is trading at a multiple of about 12 times its 2012 earnings-per-share estimate of $1.37, but should reach 15 times given its clean inventories have potential for 33 percent backlog growth for spring ’12.

And at DSW Inc., “shares are at attractive levels for investors looking for growth at a reasonable price,” said Susquehanna Financial analyst Christopher Svezia. “[It has proven its] ability to grow comps by superior store execution.” As of close on Wednesday, DSW was trading at $44.54.


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