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6 stocks that thrive on outdoors chic
These companies that make boots, sandals and sportswear are branching out to become fashion trend-setters as well. Prices have soared, but many analysts still see value.
By Michael Brush
Heading off for some boulder scrambling this summer? If so, you need to worry about more than whether your bodys in shape. Better make sure that wardrobe can cut it, too.
Judging by recent trends at the checkout counter, outdoor types are packing clothing and footwear thats got the latest advances in technical design, for sure -- but also a smart enough look to impress fellow adventurers.
To get the right feel and look, you may want to pack some sleek, high-tech Merrell walking shoes produced by Wolverine (WWW, news, msgs). Or try the trendy-yet-functional outerwear and boots by Columbia Sportswear (COLM, news, msgs). For water sports, you cant go wrong with the laid-back Teva nylon-strap sandals from Deckers Outdoor (DECK, news, msgs).
Enthusiasm for the fashionable, functional brands is driving powerful sales trends at these rugged outerwear companies, making them stand out in an otherwise sluggish apparel sector. Their stock charts look a little like the mountain peaks where their goods are put to the test.
(Theyre part of powerful uptrend in apparel stocks generally. The group is up 13% for the year and 27% since bottoming last winter. For a screen of the group, click here.)
Columbia Sportswear, for example, leapt $6 to hit a 52-week high of $54.40 last week after reporting 22.5% second-quarter sales gains that make it seem more like a late-1990s tech company than a clothing maker. For the year, the shares are up nearly 62%. Its the same story across the landscape for outdoor gear companies clever enough to nail consumer tastes and needs. Deckers, Wolverine, sporting-goods producer K2 (KTO, news, msgs) and surfer-dude-duds maker Quiksilver (ZQK, news, msgs) all have traded at 52-week highs recently after doubling, more or less, in the past 12 months.
Whats going on here, and is it too late to buy these shares? Analysts and money managers who own shares in these companies cite the following five trends -- many of which have stamina.
Nature is hot
In times of intense geopolitical and economic stress -- times like these, in other words -- people head for the great outdoors to unwind.
You have a spiritual thing going on, and that is, the world is getting complex and people are saying Lets get back to the basics, says Douglas Otto, chief executive of Deckers. And the basics are Lets go outside and enjoy ourselves.
But theres a more practical side to all this, as well. Many people still worry about flying or spending time at high-profile tourist resorts that might be targets of terror attacks. Or else they have less money for exorbitant vacations. So a little mountain time looks more attractive.
Moreover, in this era of telecommuting, its easier to hole up in bucolic Montana for long stretches, plugging in to the office via laptop. While demographic trends help, baby boomers with more free time aren't the only ones communing with nature. Physically challenging outdoor sports such as climbing, boulder scrambling and mountain biking also are popular with their offspring, the so-called echo boomers.
Outdoor apparel makers play the fashion game
The outdoor apparel companies with some of the hottest products, like Wolverines sleek Sprint series of walking shoes sold under the Merrell brand, are the ones doing the best job of predicting fashion trends. That's no accident. These companies are aggressively researching the fashion scene, deploying scouts to London, for instance, to scour the streets and shops of trendy Neal Street and Covent Gardens for cutting-edge ideas.
Inspiration is coming from directions from car designs to economic and geopolitical trends, says Jacques Lavertue, president of Wolverines Merrell footwear division. Consumers, for example, are likely to favor livelier colors when times get better. That happens to be the bet Merrell is making in its lineup due out a year from now.
Who knows whether Wolverines Merrell will get that one right. But efforts such as these sure helped Wolverine hit the fashion trends recently. Merrell sales bolted up 35% last year, and theyre expected to grow an additional 20% this year. Wolverines Harley-Davidson, Bates and Stanley brands all posted double-digit sales gains recently.
Another big winner at the moment: Deckers comfy sheepskin Ugg boots. Sales jumped 26% in the most recent quarter, thanks in part to buzz in the press about Ugg-sporting celebs from Bruce Willis and Leonardo DiCaprio to Pamela Anderson.
In surfing and skate boarding, Quiksilver has the go to designs for riders who want to look just right coming out of the pipe. The companys knack for staying hip inside the surfing culture with styles that also appeal to the mainstream has driven brisk sales gains for the Quiksilver and Roxy lines -- gains that should support 30% earnings growth this year, analysts predict. The company also has a healthy double-digit order backlog for the next six months, says Himali Kothari, an analyst with John Hancock funds, which owns shares in the company.
Vans (VANS, news, msgs), another board-oriented apparel company, was hit hard over the past two years when it missed some fashion trends. But now it looks like it may be rebounding. Same-store sales advanced 9% in the most recent quarter as new lines of womens wear piqued some interest.
Popular brands branch out
Outerwear makers are using a tried-and-true trick often employed by traditional apparel makers: Put popular brands on new products. Thats part of Columbias success right now as it moves beyond outerwear, where it made its name. Outerwear is the anchor, but we are taking that brand to other categories like footwear and sportswear, says Bryan Timm, Columbias chief financial officer.
Columbias Saw Tooth trail hiker boot, for example, has caught on. Its popularity contributed to footwear sales growth of 60% in the most recent quarter. Sportswear lines are doing well, too, and these areas should support overall sales growth of 12% to 14% this year at Columbia, Timm says.
Likewise, Deckers plans to build on the popularity of its Teva sandals. Originally designed by a Colorado river guide for use on watercraft, the sandals became the footwear of choice for many college students on their coming-of-age romp through Europe.
Deckers recently bought the Teva name from the original designer, giving the company more control over the brand. Now it plans to put the insignia on trail shoes, opening a door into the $2.3 billion rugged outdoor footwear market, an enormous playing field compared to the $355 million sport sandal market. The Teva brand also will appear on eyewear, bags, packs and other apparel. It is a pretty good opportunity to leverage their core brand, says Chris Serra, a portfolio manager at Thrivent Financial.
Likewise, Wolverine is expanding the popular Merrell brand beyond footwear into packs, luggage and socks.
Growth is global
Anger abroad about U.S. foreign policy was supposed to cause a backlash against U.S. consumer products. But thats not the case in the market for outdoor apparel and footwear, at least. We are not seeing that at all, says Columbias Timm. Indeed, France -- the most vocal opponent of U.S. policy in Iraq -- happens to be Columbias strongest market. Sales growth in Russia, another dissenting international voice, was also quite strong last quarter. Columbia counts Germany and Spain among its stronger markets, too.
Columbia has made the boldest move into foreign territory, planting a distribution center in Cambrai in northern France. European sales growth should continue to build at a good clip because competitors tend to be small and localized, and Europeans generally lead an active outdoor lifestyle, says Susie Hultquist, an analyst at Liberty Acorn funds.
Quicksilver, meanwhile, recently bought its Australian and Japanese licensees, which will give the company better control over growth. It represents a major opportunity for them to expand, says John Hancocks Kothari. She thinks theres plenty of room to grow in Europe, because Quicksilver lines are relatively new there. Likewise, Wolverine just bought the European distributors of the Merrell lines.
Building through acquisition
Successful sports gear and apparel companies are also expanding by purchasing smaller brands. Growth through acquisition is tricky -- it can be hard to merge product lines, let alone corporate cultures. But there can also be advantages to mergers that bring juicy returns for shareholders.
In retail, for example, its become more difficult for small producers to sell to big outlets such as WalMart (WMT, news, msgs) or Target (TGT, news, msgs). These large chains have the clout to demand low prices and favorable credit terms that pinch small companies.
But if you take a solid brand such as baseballs Rawlings, which used to be owned and managed by a tiny independent company, and hand it over to bigger player in sports gear distribution such as K2, theoretically profits will improve. With its wider distribution reach, K2 should put Rawlings baseball gloves and apparel into more stores. And as a sports gear manufacturer, K2 may be able to help Rawlings improve production, as well.
K2s recent purchase of Rawlings is part of a larger strategy by K2 Chief Executive Dick Heckman to consolidate sports-gear producers and build out his companys product line to make it one of the biggest suppliers to major sports retailers. They are looking to buy the premier brands, and theres nobody else doing it, says Raymond Jones, a Delafield Hambrecht analyst who follows outdoor recreational trends closely. He thinks Heckmans strategy could build K2 sales to $2 billion from $720 million over the next two years.
Columbia has been on the acquisition trail, too, purchasing Sorel, a footwear maker, and Mountain Hardwear, a high-end outdoor gear and apparel brand. Sales of these lines should get a boost because of Columbias distribution strength. Wedbush Morgan Securities analyst Michael Pachter believes Columbia has no choice but to keep making acquisitions if it wants to maintain its healthy growth rate and price/earnings multiple. (Smaller companies that could be buyout targets include LaCrosse Footwear (BOOT, news, msgs) another outdoor footwear maker.)
Are they buys now?
Investors owning these companies need to know theyre also holding the risk that designers will miss the next turn in fashions. Even with scouters trolling Londons trendy districts for the next big thing, companies with a knack for catching trends often miss the next one, leaving investors stuck with out-of-fashion returns.
That said, many of the trends noted here appear to have "legs," and some of the sector's valuations remain attractive.
Trading at 16.7 times next years estimates of $3.17 per share, Columbia carries a significant premium to the group valuation of around 12.3 times earnings. Likewise, Wolverine, at 13.7 times next years estimates of $1.38, carries an above-average valuation, at $19 per share. The stock also faces technical resistance at $20-$21, says Thomas DiBella, a portfolio manger with the Turner Small Cap Equity fund (TSEIX), which holds the stock. In short, investors who want to own these stocks may do well to buy part of a position now and then wait for pullbacks.
In contrast, at $7, Deckers trades for just 10 times forward estimates of 59 cents per share, making it more of a bargain. And Vans, trying to dig itself out of a slump, looks like the value play in the group. If you subtract the companys liabilities and long-term debt from its assets, you get $125 million. Thats just $37 million less than its market cap of $162 million, points out DiBella.
So investors are paying about $37 million for a company that has sales of $300 million and a brand name, says DiBella. The company has some problems, but we think there is a real brand name there, and they will fix the problems.
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