Overheard On Wall Street: Lower Oil, Leather Prices To Boost Footwear

Another tumultuous week is in the books for Wall Street and all of those aboard the global stock market roller coaster ride that’s eked on during the latter part of the summer.

In addition to ongoing concerns over China’s economic woes, investors have been watching declining oil and leather prices in hopes that the latter could boost profit margins and the former could spur consumption.

Cowen & Co.’s team of refining analysts said, in an Aug. 27 report, that they expect gas prices of roughly $2.15 by year-end that could result in around $70 billion in savings for U.S. consumers.

While consumer gas savings over the past year have not translated into the retail sales gains that many footwear and apparel companies had been hoping for, Cowen’s footwear and apparel expert John Kernan noted that there could be a stronger uptick in consumption in the year ahead.

“Based on historical personal consumption expenditures trends, clothing and accessories spending could benefit by $1.8 billion to $2.4 billion through Fall 2016 in this scenario,” Kernan wrote in the Cowen report. “With oil prices down 60 percent year-over-year, lower costs of oil-based synthetic apparel and footwear should benefit athletic vendors.”

Kernan added that some vendors could see a mid-single-digit benefit to cost of goods sold but higher labor costs in Asia might have an offsetting effect.

“Innovation in athletically inspired apparel and footwear has provided merchandise margin stability and higher [return on investment capital] for Nike, Under Armour, VF Corp, Columbia Sportswear, Hanesbrands Inc. and Foot Locker while lower cost of goods sold could benefit into 2016,” Kernan said.

Macquarie Securities analyst Laurent Vasilescu also noted, in an Aug. 28 report on Caleres, that he expects lower input costs will be a meaningful tailwind for the company going forward.

“Caleres continues to work with partners to reduce costs, particularly on soles, to reflect the decline in petroleum prices year-over-year,” Vasilescu wrote. “With leather representing 30 percent of cost of goods sold for the footwear industry, Caleres’ FY16 margins will also benefit from the recent decline in prices.”

In an Aug. 20 note, Vasilescu also called out VF Corp, Wolverine World Wide Inc., Deckers Brands, Columbia Sportswear, Nike and Genesco Inc. as potential benefactors of the 40 percent decline in leather prices over the last six months.

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