Investor's Business Daily, August 31st, 2007
The craze for candy-colored plastic Crocs has soared as fast as a sugar high. Consumers can't seem to get enough.
But much of the footwear business seems to be treading in place.
Barring crowds at the Crocs' CROX booth and a few others, overall foot traffic was said to be lighter than usual at the annual World Shoe Association convention in Las Vegas this summer.
Shoe insiders weren't surprised. Crocs aside, the footwear business isn't sporting a lot of new trends for consumers to sink their feet into.
Many shoe trends are in their second or third year, so there's not as much need or desire to buy new pairs this year, they say.
Take ballet flats. They were a hit last year and they are still trendy this year. The wedge look that women went ga-ga over two years ago remains popular this year.
Not everyone is resting on their laurels. During the Las Vegas show, Deckers' DECK new upscale Ugg line attracted almost as much attention as Crocs.
After the herdlike run on Ugg sheepskin boots that began a few years ago, attendees were curious about the second act. Deckers is now positioning Ugg as an affordable-luxury brand. But, as is the case with Crocs, comfort is still a selling point.
"The truth is, right now it's all about Crocs and Uggs," said analyst Jeff Mintz of Wedbush Morgan Securities.
1. Business
Don't tell that to other shoemakers. It's a stampede out there. Thousands of brands compete for consumers' wallets.
Vendors struggle to get their products distributed, selling into wholesale, specialty shoe stores, department stores and mass-market discounters such as Wal-Mart WMT and shoe chain DSW DSW, which is gaining steam.
"Once you're in a door, then it's (about) getting more shelf space," said Mintz.
A number of footwear firms are opening or expanding their own stores. There, they can display their whole lines and test new products before rolling them out on a larger scale.
Even Ugg and Crocs stores are being opened on a limited basis.
Expansion into international markets often gives a boost to vendors' sales and profit, since they are able to price products higher.
Most of the bigger shoe firms have overseas strategies. Of shoe powerhouse Nike's NKE $16 billion in total sales in fiscal 2007, which ended May 31, $4.7 billion came from Europe. Asia-Pacific kicked in $2.3 billion.
Crocs' international sales in the last quarter were up nearly 300% from last year and made up 49% of overall business.
Skechers SKX sells about 63% of its casual athletic footwear at wholesale in U.S. retail stores and 20% at company-owned stores. The rest is sold to overseas units and third-party distributors.
Overseas sales at Skechers jumped 62% in the second quarter from the year before.
Deckers' international sales in the last quarter leapt 101% over the year before, to $14.7 million.
Even though most shoes are now made in China, costs are rising. So is overall pricing.
Still, average selling prices are under some pressure due to the popularity of lower priced shoes such as flip-flops and Crocs. The trend away from pricey technical sneakers to cheaper casual-athletic shoes is also a factor.
Ultimately, success boils down to sparking customers' interest: Is this shoe for you?
"If there is not something hot or new, then people aren't going to spend their money," said Meredith Derby, an editor at Footwear News.
The lack of new trends has hurt Steven Madden SHOO, a firm quick to jump on the new-fashion bandwagon.
Name of the Game: "It's all about product. In the end that drives everything else," Mintz said. "It has to be the right style at the right time."
2. Market
U.S. footwear sales are expected to reach $59.9 billion this year, up 4.8% from last year, according to TNS Retail Forward and the Commerce Department. That's a slower pace than last year, when sales rose 5.5%.
One reason growth in sales is slowing is that consumers are buying cheaper shoes, such as Crocs.
Retail Forward estimates that footwear sales will grow 3.9% a year on average between now and 2011.
A near-term bright spot is back-to-school shoe purchases. The National Retail Federation expected average footwear sales for this school season to rise a higher-than-average 10.3% over last year.
Categories that have seen the highest growth rates over the 12 months ending in July include leisure/low performance shoes and work and safety footwear, according to the NPD Group. Both categories saw double-digit growth.
Stylish low-profile athletic leisure sneakers such as Pumas and their look-alikes have shoved technical sneakers to the back of the closet.
Now that they are not having technical athletic shoes do double-duty out on the town, men are buying more shoes than they used to, Mintz says.
Mintz says K-Swiss KSWS has suffered from the shift away from wearing technical athletic shoes as street wear. K-Swiss hasn't been doing too well with women, either.
It recently blamed a 25% drop in its backlog orders for women's footwear to greater demand for flip-flops, molded footwear and canvas shoes during the summer. The firm focuses on high-performance and casual athletic lines.
Nike's core athletic footwear products haven't been hurt by the new trends, however. Orders are up more than 10% from last year.
Nike said it will roll out a stand-alone store chain with Foot Locker FL, called House of Hoops. The stores will carry Converse, Jordan and Nike-branded basketball shoes, apparel and gear.
Dress shoes showed the biggest drop in the last year, with sales down nearly 12% from the year before.
But there are pockets of strength. Outdoor footwear seems to be attracting more attention, analysts say, especially now that the category has become more mainstream.
Wolverine WWW is expected to see strong sales gains from its high-margin Outdoor Group, which includes the brands Merrell, Sebago and Patagonia.
3. Climate
When it comes to impulse buying, shoes are near the top of the list. That's especially true when customers buy a second pair of shoes when they only meant to buy one pair.
Still, the economy, gas prices and other factors that affect disposable income do impact footwear purchases.
"Mall traffic has been struggling the last few months because of overall economic issues," Mintz said. "With mall traffic down, it's tougher to sell shoes."
Labor issues overseas continue to rile global shoe brands. Indonesian workers recently staged protests outside Nike's Jakarta office over its plan to end contracts with two of its suppliers.
4. Technology
The shoe industry has lots of new, high-tech materials to work with, such as Crocs' plastic-resin Croslite shoes. Eco-friendly alternative materials are cropping up, too. Deckers, for example, is launching a line "eco-sneaks" made of recycled and sustainable materials.
More footwear firms are looking into "negative heel technology," pioneered by Earth Footwear shoes.
Earth Footwear says its company's shoes, which place wearer's heel slightly lower than their toes, aligns the body in a more natural position, which helps joints and muscles.
Meanwhile, shoe firms continue to branch out to the Web to augment sales. Zappos.com carries more than 1,000 brands and 145,000 styles online.
TNS Retail Forward estimates Zappos has carved out about 23% share of the online shoe market, which it pegged at $2.65 billion in 2006.
Amazon.com AMZN and Gap GPS launched new online shoe sites in the last year, "endless" and "Piperlime." IAC/Interactive IACI acquired Shoebuy.com last year.
5. Outlook
Footwear followers are taking a cautionary stance toward the industry.
With no clear new trends on the horizon, "We're now wondering where it's heading," Footwear News' Derby said. "It's company specific."
Upside: Overseas expansion offers growth opportunities. Marketing tie-ins and licensing deals are always good ways to bring in extra cash.
Nike, which just opened a flagship store in Beijing, expects to cash in marketing dollars from the 2008 Olympic Games being held in Beijing.
Risks: Fashion risk is at the top. Shoe buyers are notoriously fickle, so finding the right fashion fit can be a challenge. And if it fits one day, it might not the next.
Timberland's TBL iconic yellow boot and some of its other boots saw sales fall off as core customers switched to other styles, such as low-profile fashion sports footwear. The firm's boot sales are expected to drop $100 million this year.
Managing inventory is always tricky. No shoe firm wants to be caught with too much supply.
Nike successfully managed inventories down through the opening of 57 new outlet stores in fiscal 2007, wrote analyst John Shanley of Susquehanna Financial Group. The company now has nearly 300 outlets worldwide.
