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Industry Analysis: Shoe
The Shoe Industry consists of a multitude of footwear manufacturers, wholesalers, and retailers. The major wholesalers in the U.S. market are owners of a brand name and typically source their shoes from independent manufacturers. The retail segment of the industry ranges from owners of large multinational chains to small local businesses. Many shoe companies operate in both the retail and wholesale arenas. Shoe companies covered by Value Line generally adhere to the standard industrial page format.
Taken as a whole, the Shoe Industry could be described as mature. However, barriers to entry are far from insurmountable. Since demand is largely driven by fashion and demographics, newcomers with a hot product may thrive at the expense of a fading rival. Indeed, the profitability of individual companies depends on their ability to design attractive footwear lines and remain at the forefront of consumers' consciousness.
There are three major product categories within the Shoe Industry and the dynamics of each may differ. The athletic shoe segment, which makes up about 30% of footwear sales, is highly concentrated, as the largest companies comprise a vast majority of the market share. Two players (Nike and adidas) dominate this category, with the giants slugging it out over sponsorship contracts with star athletes and snuffing out the competition using their economies of scale in distribution and marketing. Men's and women's casual and dress shoes make up about 40% of the market (15% men's and 25% women's, respectively). The companies within these categories tend to be smaller than their athletic counterparts and compete on the basis of superior design. Thus, the market for men's and women's shoes is much more fragmented, consisting of a myriad of bit players. Women's shoemakers, in particular, must be lean and flexible to meet the changing tastes of their consumers. Demand here can be fairly cyclical, but the ebb and flow of performance can be attributed more to the individual product portfolio rather than macroeconomic factors. The economy does play a role in demand, though, particularly for products that are more up-market. The remaining 30% is comprised of various niche product categories and boom-or-bust novelty designs.
Due to rapidly changing tastes of shoe buyers, it is important for shoemakers to continually offer better and bolder product lines to catch the consumer's eye. For the athletic shoe companies, this largely means improving comfort and performance. In the dress and casual markets, it means offering smart, fashion-forward designs. Superior products also command higher price points, improving profitability. That said, the worst thing a company in the shoe industry can do is expect to coast by on the back of a few successful product offerings as the rest of the market passes it by. Even though this can lead to great short-term growth, it is not a recipe for long-term sustainability. The success of a company's product offerings can generally be gauged by the following performance metrics.
For shoe retailers, comparable-store sales is a key measure of revenue performance. Although this statistic is not displayed as part of our numerical presentation on the Value Line page, it is often referenced by analysts within the stock commentary. This metric measures top-line growth at the existing store base over a set period of time, usually on a quarterly or yearly basis, rather than including newly opened locations. Healthy same-store sales gains indicate that the retailer is successfully stocking desirable products and provides meaningful insight into future earnings performance. Although retailers face high fixed costs related to rents and inventory, strong comparable-store sales growth will dilute the impact of these expenses and improve operating leverage.
Inventory levels are also of particular concern. Inventory growth is positive, if it is paired with an increased market presence. However, it may mean a sharp decline in profitability is at hand, absent a corresponding rise in the store count/distribution footprint. Retailers that misread market dynamics and order excess product often face the prospect of deep discounts, depleting profits. The same can be said of wholesalers that overproduce footwear without a corresponding retail market.
Investors in these stocks should focus on companies with healthy growth and a lean cost structure. Efficient inventory management is of the utmost importance, as fashion trends may change seemingly overnight. For retailers, this means maintaining a pulse on consumer demand and achieving economies of scale in procurement and marketing functions. Within the wholesaling segment, this means strong supply chain management coupled with an increasing distribution footprint. This type of flexible structure enables a shoemaker to adapt to changing trends and come out a relative winner no matter what the economic environment.
Companies within the Shoe Industry are impacted by a variety of factors, from the macroeconomic environment to fashion trends within particular footwear categories. That said, investors should pay close attention to same-store sales and margin trends, as well as inventory management. The companies that succeed in these areas tend to be the best run and, thus, are more likely to stay ahead of fashion trends and remain competitive in the marketplace. Strong brand recognition is another factor to take into consideration, as these names are more likely to resonate with consumers when faced with similar product offerings.