The Lowdown On Q3’s Slowdown

Despite a relatively healthy consumer backdrop going into the third quarter, shoe companies grappled with ongoing currency pressures, inventory challenges and “overreaction” on the part of investors following their earnings releases.

The Inventory Controversy

Wolverine World Wide Inc. was the first to unveil its financial performance for the quarter, and though the firm’s numbers were mostly in line with forecasts, market watchers expressed concern about the company’s slowing domestic businesses, elevated inventories and continuously flat revenues at Sperry.

Inventory was up 6 percent in Q3, versus an anticipated sales decline of low- to mid-single digits in Q4,” noted Sterne Agee CRT analyst Sam Poser. “Management expects inventory levels to be up by high-single digits at the end of the year and remain high through at least 1Q16. Companies that hold off on markdowns often end up shooting themselves in the foot [as] sales and margins are likely to be damaged.”

Under Armour Inc. and Skechers USA Inc. also experienced slower momentum and sluggish investor sentiment in Q3 after both companies upstaged Wall Street with stellar performances in the second quarter.

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Inventory concerns were yet again the culprit, with Under Armour’s sped-up footwear growth resulting in increased footwear liquidation as well as a need for more product on hand — two concepts that seemed to confuse investors.

Analysts, however, dismissed investor concerns as a misunderstanding of the factors, which may actually signal strength at the brand.

“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,” Lyon explained of the apparent inventory overages. And the increased liquidation, Lyon explained, was just a consequence of the brand’s rapid footwear growth.

Skechers’ inventories also rose 38 percent year-over-year, which investors may have viewed as high against a backlog of 28 percent. However, B. Riley & Co. LLC analyst Jeff Van Sinderen pointed out that the excess inventory “is spoken for, cancellations have been insignificant and China is not included in the backlog, but is included in inventory.”

Citi Research analyst Kate McShane also found the firm’s explanation of high inventories to be sound.

As the broader inventory backup at U.S. wholesale is worked down ahead of holiday, a cleaner retail environment should open up more shelf space for Skechers at wholesale in Q4 and beyond at the expense of underperforming brands and private labels,” McShane wrote.

VF Corp., which reported on Oct. 23, saw its inventories increase 12 percent during Q3, “one of the fastest growth rates we have seen in several years,” McShane said.

“However, management attributed a good portion of that to an increase in direct-to-consumer door count year-over-year,” explained McShane. “In addition, retailers asked for product to set their floors later in the year (mid-October, versus earlier in October). By the end of the year, management is guiding inventories to be in-line.”

CL King & Associates analyst Steven Marotta and Van Sinderen said the inventory issues experienced by Wolverine and others are a consequence of an industrywide sales downshift.

Warmer weather and/or a lackluster consumer led to a slow pace of sales through September and some of October,” Marotta said.

On the heels of its Q3 earnings release, Skechers’ shares fell 30 percent, and Under Armour and VF Corp. also shouldered significant stock declines. But market watchers remained mostly upbeat on the companies and almost unanimously called the sell-offs overdone.

The Currency Chronicles

While successful shoe companies often pride themselves on their global growth goals, many are now feeling the adverse effects of international exposure as the strong U.S. dollar takes its toll on revenues.

For VF Corp. — whose North Face, Timberland and Vans brands have enjoyed a large and favorable reception globally — currency pressures have stretched on for at least the past two quarters.

In Q3, the firm continued to see significant differences between reported revenues and its currency-neutral figures. Currency-neutral sales for Vans were up 10 percent, while its reported sales inched up just 2 percent. Revenue at Timberland gained 21 percent on a currency-neutral basis but only 11 percent on a reported basis.

Wolverine tackled similar FX challenges. Blake Krueger, the firm’s chairman, CEO and president, acknowledged, during the Q3 conference call, that the strong U.S. dollar “put pressure on the cost of footwear” and that the firm protected gross margins by “selectively increasing prices” in international markets.

Looking ahead, Van Sinderen said he expects shoe companies will continue to face additional strain from slipping product demand and unseasonable weather.

We think that the generally slow business of the last couple of months will create some pressure into Q4,” Van Sinderen said. “We expect a pretty promotional holiday, with heavy discounting in some categories.  That said, some companies will still perform relatively well.  There are some fashion trends to underpin business and overall, and the athleisure business is not going away any time soon.”


**This article originally appeared in Footwear News’ print magazine on Nov. 2, 2015.

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