Here are some analysts comments on the athletic footwear industry. The questions concern the shoe companies rather than the retailers, but the info is still relevant to FEET investors.
Briefing: Do you think that the worst is over for the footwear companies and do you consider stocks like Nike and Reebok good investments for value investors?
Peter Russ: I don't think that there was a worst to be over. The problems that the footwear manufacturers have experienced are largely due to retailers' over enthusiasm. The footwear manufacturing stocks have come off their highs because they were too pricey given what is the real underlying growth of these companies. The business hasn't suffered, just the stocks.
I think that Nike is a very good investment. In 3-5 years, we see potential for a $100 security. They are the dominant global brand and getting stronger. Is think that Nike's main competition is adidas (which is not traded in the U.S.), not Reebok. Reebok has been wandering along without much direction in recent years. A few niche companies like New Balance and Ryka (both private) will probably grab a half percent market share, at least domestically, but Nike is the clear leader. The value in this business is accruing to leaders not followers and Nike and adidas are the two out in front.
Diane Daggatt: Yes, we think that the worst is over for these companies and that most of the bad news is already in the stocks. Inventory positions appear to have peaked, but Nike expects theirs to peak at the end of the third quarter. Some of these companies certainly make sense for value investors. Since we don't see any big moves in this group in the near-term, we would caution investors to take their time and do their research before investing. Nike cannot get back to fiscal earnings of $2.68 until the situation in Asia Pacific turns around.
David Mossberg: These companies have tremendous value in their brand names and should trade at a premium to their growth rate. However, we think that growth rates and earnings are likely to continue to be effected by inventory problems, the "brown shoe" (casual) trend in footwear, and consumers who are now conditioned to wait for 30-40% markdowns. In the near-term, we think that these companies will experience shrinking growth rates and projected earnings which will drive their stock prices down with them. Long-term, however, we think that Nike, in particular, will be a good value.
Briefing: Companies such as Nike and adidas have expanded their product lines beyond footwear and apparel to include sporting equipment. Will this strategy prove successful and how long will it take for sales of these products to have a positive impact on earnings?
Peter Russ: In the case of Nike, we will probably see a modest positive impact in Fiscal 1999 (next 15 months). However, the overall success of Nike's strategy to broaden its product offerings will take into the beginning of the next millennium. They need to get volume on the new products up around $1 billion and we need to see that margins are as strong as they are with the shoe business. While Nike is developing their new products from the ground up, adidas got a leg up by buying Salomon Ski and Equipment company. Salomon does over $1 billion in volume in sports equipment. It is a good strategy for adidas - trying to beat Nike to the punch. It should make them a more formidable competitor.
Diane Daggatt: We do not follow adidas, so I will keep my comments to Nike. In the long-term, we expect this strategy to work for Nike. In the near-term, Nike does not expect that its sporting goods business will have a meaningful impact on its bottom line. To give this some perspective, last year Nike's sporting goods division generated about $100 million in sales. Their total annual sales were just over $9 billion. Nike was attracted to sporting goods because when you break down global industry sales, footwear generates $28 billion, apparel generates $30 billion, and sporting goods generate $40 billion. We see this as a positive move for Nike and expect them to do well in this sector long-term.
David Mossberg: I think that leveraging strong brand names into other product lines will prove successful in the long run.
Briefing: How long will it take to eradicate the huge inventory glut that is negatively impacting industry profits?
Peter Russ: Six Months.
Diane Daggatt: Nike expects to have their domestic inventory problems cleaned up by the end of May and Asia Pacific by the end of Fiscal 1999. They have announced that they will take a restructuring charge, but we don't know if that will include an inventory write-down. They can only write-down inventory that is not saleable unless they use some of their inventory reserves. We think that it will probably take Nike several quarters to get inventory levels back in line.
David Mossberg:It is not clear how long it will take to get inventories in line because mark downs of slow selling inventories are conditioning customers expect mark downs in the future. This is going to be a big problem to overcome.
Briefing: Which stocks are you recommending and/or avoiding?
Peter Russ: We have a BUY on Nike (NKE) and that is the only company that we are recommending in the sports area. The "ifs" on the competitors outweigh the rewards. We are not impressed with Reebok (RBK) . We think that their market strategy and brand message is confused and we don't see any indication that this is changing. We would not buy Converse (CVE) as we think that they also have a confused strategy. We would aggressively avoid Fila (FLH) - might even short the stock. We would consider adidas if it was traded in the U.S.
Diane Daggatt: Because of no near-term catalyst to move the stock, we have a NEUTRAL rating on Nike (NKE). However, we believe that this is a solid company for the long-term and will upgrade it once there is a reversal in trends.
David Mossberg: We like the Stride Rite (SRR). They have signed an impressive licensing agreements with Tommy Hilfiger, Levis and Nine West for Kids. Hilfiger men's footwear, introduced this spring, more that exceeded expectations with $75 million in sales and Hilfiger will introduce a women's line and a new Levi's footwear line in the fall that should provide a big boost to sales. SRR management has also improved sales and profitability of its proprietary brand names, Keds and Sperry Top-Sider. Sales should continue to benefit from both an aggressive marketing campaign this spring and the trend to casual footwear. Unlike other casual oriented footwear manufacturers which have seen significant moves in their stock prices over the last few months (Timberland & Wolverine Worldwide), SRR is still undervalued, trading at P/E multiples below its earnings growth rate.
We also follow Ft. Worth based Justin Industries (JSTN). We believe Justin's odd combination of footwear and building materials have kept it off the radar screens of many investors. Nonetheless, we believe it has tremendous value. The replacement value of their building materials division alone is worth in excess of $13 per share. With the current trading price at about $13 1/4, investors can effectively buy Justins building materials business and get the footwear division for free. Justin has the strongest brand names in the western footwear sector: Justin, Tony Lamma, Chippewa, and Nocona. Western footwear has declined in popularity but may hit bottom soon with the trend towards casual and a possible change in fashion. Mademoiselle magazine recently had a 6 page layout with western footwear and Ralph Lauren is rumored to be introducing a line of western boots. Justin is also diversifying into more broad based line of footwear with its new Justin Workboot and the launch of women's western oriented footwear this spring. We believe there will be significant upside in Justin's stock when western footwear popularity returns. |
