Valuation of the shoe industry

Weekly Corporate Growth Report, Dec 1, 1997

The athletic footware market is experiencing a relatively severe slowdown of late. The bottom lines of even the largest athletic shoe manufacturers are being hurt by stagnant sales and increasing markdowns. This is the direct result of a consumer shift to what are known as "brown shoes," or outdoor boots and casual shoes. Simply put, athletic shoes just aren't that cool right now.

The trend of wearing "nice" shoes took hold just as the everimportant back-to-school season began, and is expected to at least last through Spring 1998. But as athletic shoe manufacturers such as Nike and Reebok are taking it in the foot, other companies are benefitting from the trend. Timberlands and Wolverine World Wide are two of Value Line's best performing companies in this industry, with the former's stock price increasing by over 300% in the last 15 months.

While the shift from white athletic shoes to brown casual and outdoor shoes is not likely to remain the norm for the long haul, it has certainly served as a reminder of the volatility of the shoe industry, or any industry driven mainly by current trends.

It is unclear when white shoes will regain their position on the throne, but until then, the athletic shoe giants are facing some tough times. Fortunately, once the trend reverses, brands such as Nike and Reebok will be positioned to bring their businesses back to the impressive levels that they enjoyed as recently as nine months ago.

Walk Across the Ocean

While most of the companies in the Shoe Industry make a majority of their profits in the US, it is unlikely that the rapid growth pace of the market can be maintained. Therefore, firms will need to expand overseas in order to spur future earnings growth.

It seems that Asia/Pacific, most notably Japan, provides the greatest opportunity for growth in the next century. By investing heavily in advertising, and endorsing local sports figures, the major player are working towards building a major brand recognition in Asia.

The next three years will be incredibly important for athletic footware companies, as they will have several key opportunities to get their name out overseas. In 1998, the World Cup will be held in France and the Winter Olympics in Japan, and the year 2000 Summer Olympics will be held in Sydney, Australia. By sponsoring these events in some way, companies' brand names and logos will be displayed to millions of customers around the world. And with the Winter Olympics on its way, the advertising onslaught is about to begin again. (Source: Value Line)