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4 stocks that put their best foot forward
A lot of manufacturers and retailers are competing to cover your feet. Here's what a trip to their shops reveals about how their businesses might do.
By Robert Walberg
After logging many miles in malls across Chicagoland in search of the best-positioned retailers, it seems only fitting to finally focus on shoes, as my dogs are barking.
Though most of us wear them every day and they are essential to our comfort, shoes are often underappreciated as fashion accessories, especially by men. While a woman might own as many as 100 pair of shoes, many men feel comfortable owning one or two pair of gym shoes, maybe one casual shoe, and one pair of dress shoes. From such limited choices come some dreadful fashion combinations.
But lets leave the fashion tips to Carson Kressley of "Queer Eye" fame and begin our analysis of which shoe manufacturers and retailers are positioned to outperform their peers and the market.
For our purposes, were going to break the shoe industry up into three groups -- discount, athletic and fashion -- and pick a winner in each.
A discounting duo
The discounters are the smallest group, with two publicly traded companies: Payless ShoeSource (PSS, news, msgs) and Famous Footwear, a division of Brown Shoe Co. (BWS, news, msgs). If youve shopped at both stores, there should be no question as to which of these two companies is better positioned for growth.
The Payless stores I shopped in were filled with unknown brands in an uninviting setting. About the only positive was that the stores were unencumbered by shoppers, though I doubt management and shareholders would share my joy in being able to saunter through the aisles virtually alone. In contrast, Famous Footwear stores were brightly lit, well-organized and stocked with several top-name brands including Nike (NKE, news, msgs), Skechers U.S.A. (SKX, news, msgs), Vans (VANS, news, msgs) and Reebok International (RBK, news, msgs). The stores were, not surprisingly, crowded with people shopping and buying.
| If the shoe fits, buy the stock | |
Brown Shoes Famous Footwear is not only a more attractive retailing experience; it also continues to be a much more attractive investment alternative. Over the past year, the stock has outperformed Payless by more than 50%. Considering its higher profit margin, stronger balance sheet, higher return on equity, superior growth prospects and more attractive dividend yield, look for Brown Shoe to outpace Payless again this year.
A handful of sports specialists
Now lets focus on the athletic-shoe companies. Included in this group are Nike, Reebok, K-Swiss (KSWS, news, msgs), Timberland (TBL, news, msgs) and Deckers Outdoor (DECK, news, msgs). Most of these brands can be found in sporting-goods stores such as Galyans Trading Co. (GLYN, news, msgs), Dick's Sporting Goods (DKS, news, msgs) and The Sports Authority (TSA, news, msgs), or at leading athletic shoe retailers such as Foot Locker (FL, news, msgs) and Finish Line (FINL, news, msgs). But instead of focusing on the retailers, were going to stick with the shoe brands themselves.
Salespeople and shoppers both affirmed that Nike remains the top brand. Admittedly, the Chicagoland area might be biased on this subject given Michael Jordans affiliation with Nike, but the opinion was so heavily skewed in that direction that Jordan alone cant explain it. Nikes positioning in most of these stores was also very attractive relative to the competition, especially Reebok. However, I did notice that K-Swiss is increasing its shelf presence, and its generally lower price point and attractive styling should help it steal market share.
From a stock perspective, all three companies have enjoyed considerable gains over the past year. Whereas the weak dollar and its leadership position would seem to make Nike the best choice going forward, its relatively high valuations suggest that most of the good news is already priced in. Conversely, Reebok sports the lowest valuation but also suffers from the lowest profit margins and highest debt burden. Consequently, my choice in this area is K-Swiss. Given its increased presence, strong financials and more attractive valuations, K-Swiss appears to be the best positioned of the three to outperform the overall market in the year ahead.
In the brown shoe category, Timberland reported better-than-expected earnings earlier this week on strong sales. More and more these days, consumers are moving away from straight athletic shoes in the casual area, and thats good news for this company as well as Deckers. Reflecting this shift in fashion, both companies are expected to post solid sales and earnings growth again this year.
From an investment standpoint, this is a battle between value (Timberland) and growth (Deckers). Though Deckers appears overextended from a chart perspective after jumping nearly 300% over the past year, its shoes are more on the cutting edge of fashion -- especially its Ugg line. If the company can live up to expectations and grow sales by 20%, then there should be upside in the stock to the $26 area. On the flip side, Timberlands price relative to its growth suggests more limited upside potential.
The heights of fashion
Last, but not least, there are the fashion shoe companies. This group comprises four companies: Kenneth Cole Productions (KCP, news, msgs), Skechers, Steve Madden (SHOO, news, msgs) and Weyco Group (WEYS, news, msgs). Though it started off principally as a shoe company, Kenneth Cole has expanded its product offerings considerably over the past 10 years. Nevertheless, its shoes remain its staple, and when it comes to offering fashion-forward shoes for men, no (publicly traded) company does it better. However, after having doubled in price over the past year, Kenneth Cole is now fairly priced at 18 times next years projected earnings. Basically, youre going to be a lot more comfortable in a pair of the shoes than in the stock.
Skechers and Steve Madden have both made big strides in recent years in capturing share in the fashion segment, though both have also had their problems living up to expectations. For example, Steve Madden recently issued a profit warning due to sluggish sales. Styling miscues, especially in its mens division, were at the root of the problem. Meanwhile, Skechers has had trouble adapting to increased competition and recapturing the growth it enjoyed a couple of years ago. Between these two fledgling fashion-footwear makers, Steve Madden looks to be the better long-term play as the company enjoys much stronger financials, decent brand loyalty and a more attractive retail presence.
You might not be familiar with Weyco Group, but you most certainly have heard of its brands -- Florsheim, Nunn Bush, Brass Boot and Stacy Adams. Its more traditional stylings and its discounted valuations set it apart from the others in this group. Another factor separating Weyco from the others is that it doesnt enjoy wide coverage on Wall Street. Combined these factors suggest that Weyco could be the hidden gem among the fashion shoe companies in 2004.
In the weeks and months to come, Ill report back on which of these shoe companies continued to trek higher and which ended up being a bad fit.
Editor's Note: At the time of publication, Robert Walberg did not own or control shares in any of the stocks mentioned in this column.
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