After last week’s shoe stock volatility and softer-than-expected earnings releases from many of the industry’s biggest names, many are questioning the strength of the economy as well as the footwear space.
Here are three factors driving down shoe companies and their stocks.
Shoe executives might as well cross train as meteorologists these days as “unseasonable weather” is often the recurring phrase in many company’s explanations for underperformance. And, unfortunately, there may be more weather drags to come.
Canaccord Genuity Inc. analyst Camilo Lyon and Citi Research analyst Kate McShane both anticipate that Deckers Brands — when the company reports on Oct. 29 — will take a hit from September’s warmer weather that likely delayed boot sales.
“With respect to Deckers, based on many discussions with our industry contacts, we believe the warmer weather pattern in the U.S. has delayed sell-throughs of core classic Ugg product,” Lyon wrote. “Conversely, we believe specialty classics and fashion products have sold well.”
VF Corp. also shouldered unseasonable weather in Q3, reported Oct. 23, although analysts say the performance of its core outdoor and action sports brands — The North Face, Timberland and Vans — remained robust.
“The persistent warm weather across many regions of the U.S. throughout the fall season is beginning to take its toll on retailers…” wrote Cowen and Co. analyst Oliver Chen on Monday. “… We believe the department stores could be most negatively impacted, and our consultants are starting to hear of cancellations and pushback on deliveries, as every day the weather does not cooperate and become chilly, the momentum in cold-weather categories that should be building throughout October fails to materialize.”
Speaking of FX headwinds, it seems those aren’t going away any time soon either. The strength of the U.S. dollar against other major currencies continues to challenge footwear companies with an international presence. Wolverine World Wide Inc., Coach Inc., VF Corp. and others were all hit by currency pressure in their most recent reported quarters.
In fact, VF Corp.’s earnings miss last week drove its share price down more than 13 percent, which seemed to have a trickle down effect on footwear and apparel shares.
“VF Corp.’s 3Q miss sent a shock through softlines stocks,” wrote UBS Investment Bank analyst Michael Binetti. “We believe VF Corp.’s outsized stock reaction is partly due to high 2016 [Wall] Street estimates amid slowing industry trends and with 100 to 150 basis points of incremental gross margin pressure from FX in ‘16.”
The industry has been like a revolving door this year. Executive changes at Ralph Lauren Corp. and Gap Inc., Iconix, Deckers Brands and, most recently, the reported departure of DSW Inc.’s EVP and chief supply chain officer, Harris Mustafa, has had significant effects on investor sentiment.
In the case of Ralph Lauren, the addition of Stefan Larsson as CEO — former head at Old Navy — sent the stock soaring. But the reverse happened at Gap (Old Navy’s parent company) after investors tried to make sense of the executive’s abrupt departure.
Similarly, DSW’s stock has taken a downgrade from Sterne Agee CRT analyst Sam Poser this week after he broke the news that Mustafa would step down from his role.
“We viewed Mustafa as a true expert in DSW’s supply chain and systems, as well as the footwear business,” wrote Poser. “His departure will likely spread DSW’s management team too thin, regardless of talent.”