Overheard On Wall Street: Inside Footwear’s Tough Earnings Week

Shoe stocks are under pressure after a series of earnings misses this week.

Wolverine World Wide Inc. kicked off Q3 for the footwear world with earnings that revealed continual revenue and profit declines stemming from global economic pressures and weakening product demand. The firm’s shares hit a 52-week low following the release.

A few days later, Under Armour Inc. and Skechers USA Inc. were the next to report.

Both companies posted decent earnings Thursday, with improvements in revenues and profits, yet their shares suffered — Skechers took the biggest tumble, down over 30 percent at press time.

It has been a sea of red across footwear stocks Friday as an array of macroeconomic and company-specific concerns drag down investor sentiment.

For Under Armour, the company’s elevated inventory and lowered gross margin outlook, as well as its announcement that there will be more footwear liquidation in Q4 overshadowed an otherwise solid third quarter.

“We view the elevated inventory position as an investment and not as a cause for concern,” wrote Canaccord Genuity Inc. analyst Camilo Lyon in response to Thursday’s stock selloff. “In prior years, Under Armour has faced challenges in delivering product on time around key sell-in dates, which has resulted in missed sales. This year, [the firm] has sharpened its focus on improving the timing of product deliveries to [wholesale] customers, especially on the key seasonal floor set dates.”

The liquidation worries, Lyon explained, are also the result of a misunderstanding of the firm’s sped-up footwear growth.

“Footwear is growing at an accelerated pace [61 percent in Q3] and becoming a bigger part of the mix,” Lyon said. “As such, during the course of normal liquidation schedules and given its outsized growth, footwear is expected to contribute more lower-margin clearance units year-over-year to the Q4 mix.”

Similarly, Susquehanna Financial LLLP analyst Christopher Szezia said he does not believe Under Armour’s “strong reinvestment track record and growth potential is being questioned.” However, other business concerns may be putting off investors.

Perhaps what’s driving some frustration is the continued lack of flow-through to generate accelerated earnings growth,” Svezia wrote. “Overall, we continue to take a wait-and-see approach, as shares appear priced-to-perfection at these levels.”

Skechers’s profits climbed 30.3 percent in Q3, and revenues rose 27 percent, to $856.2 million. Market watchers were betting on revenues of around $876.5 million and earnings per diluted share of 55 cents — the company’s diluted EPS were 43 cents.

Citi Research analyst Kate McShane called the massive selloff — the firm has shed a third of its share price since the release — “overdone” and pointed to the firm’s “robust” revenue growth as evidence.

Despite a softer Q3 U.S. retail environment, Skechers’ brand momentum remains intact,” McShane wrote, reiterating a buy rating on the stock. “International wholesale remained strong at 53 percent year-over-year, and global backlogs were up 28 percent year-over-year; inventory growth of 38 percent outpaced sales, but management attributed higher levels to timing of U.S. shipments and [direct-to-consumer] expansion. More importantly, [average selling prices] increased 6.8 percent year-over-year in Q3, which indicates that while Skechers’ wholesale account may be experiencing inventory buildups requiring heavier clearance, Skechers product is not being discounted at retail and inventories appear relatively healthy.”

Double-digit retail comps, “outpacing flat U.S. retail trends,” also bolstered the analyst’s confidence in the brand.

B. Riley & Co. LLC analyst Jeff Van Sinderen lowered his EPS outlook for the firm to “better reflect the domestic backdrop” and knocked $14 off of his price target, bringing it down to $40. Van Sinderen maintained a buy rating on the stock and expects the company’s recent results to foster more reasonable expectations going forward.

With the ‘beat & raise’ crowd exiting, the multiple has come down to earth, and Skechers is now more of a ‘GARP’ situation,” Van Sinderen wrote in an Oct. 23 note. (GARP = Growth at a Reasonable Price.)

VF Corp., feeling the pressure of a stronger U.S. dollar and other macro challenges, such as slower oil exploration, also joined the softer-than-expected earnings group Friday with declining profits and revenues that grew at a low-single-digit rate in Q3.

The firm lowered its financial outlook, and its share price slipped over 13 percent by press time.

The two key factors driving the miss were: steeper FX drag and deteriorating performance of the smaller coalitions (imagewear, sportswear, contemporary, which in total represent 17 percent of sales and 12 percent of EBIT),” Lyon wrote, adding that Friday’s stock reaction was “overdone.”


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