NEW YORK ( TheStreet) -- Footwear stocks may be a safe place to ride out the inflationary pressures of the summer. The sector has been outperforming the apparel space in 2011, as newness has been driving sales.
"While we agree that the consumer environment is awfully fragile, we think that the footwear space is much better positioned to weather the impending storm coming in the second-half of the year when most retailers will attempt to pass along product cost increases to the consumer," WJB Capital analyst Robert Samuels wrote in a note. "Product innovation by the brands and a less promotional environment at retail gives us the confidence that the sector can continue to outperform, even in the face of these headwinds." In comparison, the apparel players remain somewhat stagnant in terms of merchandise offerings, giving shoppers little reason to open their wallets. But footwear makers and retailers are providing this novelty with innovative offerings in boots and lightweight and barefoot running shoes, as well as embellishments and high heels. "Given disappointing economic data, rising costs and stubbornly high unemployment, it is no surprise that retail stocks have fallen out of favor recently," Samuels wrote. "However, we are big believers in the strength of brands and great product and think that the footwear space, whether athletic or fashion, is offering this to consumers." Footwear companies aren't necessarily immune to higher gasoline prices and sourcing costs, but they do tend to have more pricing power than their apparel counterparts. Read on for a look at the footwear stocks with which you can ride out inflationary pressures this summer.
Steven Madden's ( SHOO) acquisition strategy is creating significant growth opportunities for the company. Steve Madden recent purchased the Cejon and Topline brands, which the company will utilize to expand its market share and create synergies across all brands, Poser said. The company purchased Cejon, a group of design and marketing companies, for $30 million last month. "The acquisition of Cejon enables us to further strengthen and expand our accessories platform," Chairman and CEO Edward Rosenfeld said in a statement. Rosenfeld said Cejon will complement the existing accessories business, which mostly concentrates on handbags and belts. The acquisition is expected to add about 7 cents to 9 cents per share in the first full year under Steven Madden ownership after accounting for the company's 3-for-2 stock split in May. Madden also purchased Topline, a privately held shoe company based in Washington, for $55 million. Topline sells its shoes, which include brands like Report, in specialty and department stores. Madden expects the acquisition to add to earnings immediately. "The strength of boots, accelerated retail expansion both through outlets and international, and expanding digital growth, all portend well for reaching or possibly exceeding our full-year EPS estimates of $2.22 a share," Poser wrote in a note. Steve Madden's business at Nordstrom has been strong, and the high-end department store has allocated prime table-top and floor space to the collection. In addition, the company is seeing success at both Macy's ( M) and Belk, Poser noted. Management raised its full-year earnings forecast, predicting earnings between $2.03 and $2.10 a share, up from prior forecast of $2 to $2.07. The company also said it is planning a 3-for-2 stock split.
Wolverine World Wide
Wolverine World Wide ( WWW) is the sleeper in the footwear space. The shoe and boot maker reported a 31% jump in earnings in its most recent quarter and raised its full-year outlook. Poser said the company's new products are helping to set it apart from its competitors. Wolverine's launch of the Merrell brand in February has been driving sales momentum, and as a result, Poser believes there could be upside to his full-year earnings estimate of $2.51 a share. Merrell's barefoot division continues to innovate, adding new offerings in both men's and women's that extend beyond just running. It now has water sport offerings. In general, lightweight barefoot products typically command a higher price point. "Merrell firmly believes that barefoot is not a trend but rather a classification that is here to stay," Poser wrote in a note. Wolverine also has been strategically raising prices, though it hasn't provided specific details. It also has stocked up on some core products in anticipation of sourcing cost hikes. Wolverine expects full-year earnings in the range of $2.40 to $2.50 a share, ahead of analysts' estimate of $2.43 a share.
If you gave up on Crocs ( CROX) in late 2008 when the stock was trading at less than $1, it could be time to take another look at the company. While the footwear maker still has work to do in repairing some of its damaged wholesale relationships, the company has effectively reduced costs and has the infrastructure in place to improve margins, Samuels said. Crocs has returned to profitability, and if management remains focused on product innovation, Samuels believes the company can deliver double-digit sales growth. Croc's new line of children's footwear, Chameleons, is one of the ways the company has been innovating. The sandals, which change color in and out of the sunlight, have been strong sellers. Samuels estimates that Crocs can grow its wholesale business by 25% this year and at least 15% in 2012, as the company adds new accounts and services the existing ones more efficiently. Samuels identifies Crocs' pilot program with Nordstrom ( JWN) as one example of the way the company is improving its wholesale business. Given Crocs' new product, accelerating retail business and recent commentary on sales trends, Poser believes his 2011 $1 billion revenue estimate may prove to be too conservative.
As the largest mall-based athletic specialty retailer in the U.S., Foot Locker ( FL) stands to benefit from demand in the running and basketball markets. Following four straight years of declining same-store sales, trends finally turned positive in 2010. "We believe that the company is still in the early-to-middle innings of a turnaround in its business, as same-store sales improvement has led to gains in productivity and tighter inventory control coupled with a better apparel offering and favorable international mix should lead to continued margin gains," Samuels wrote in a note. Apparel is a potential catalyst for the stock, and the turnaround potential for the business has been overlooked in the market. "Currently, apparel is nowhere near half of Foot Locker's business and it will likely grow faster than footwear," Samuels wrote. "Also, apparel margins, which should inherently be higher, are lower than footwear but have begun to improve. We estimate they lag footwear by 300 to 500 basis points. As the apparel business continues to grow, there is a positive impact on both sales and margins." The retirement of Chief Executive Matthew Serra is also expected to be a positive for Foot Locker. " His resignation may have been a blessing in disguise, not only for the company, but also the industry as a whole, as he was hyper-focused on driving sales at the expense of brand integrity and margin," Samuels wrote in a note. Foot Locker has about $663 million in cash on its balance sheet, which should help to limit downside risk in the stock, Samuels said. It also gives the company potential to significantly increase it dividend over the next several years.
Finish Line ( FINL) reported in-line first-quarter earnings on Thursday, but sales missed estimates. During the quarter, the company earned $16.4 million, or 30 cents a share on revenue of $299.5 million. Analysts were calling for a profit of 30 cents on revenue of $301.4 million. Same-store sales grew 6.5%. "Even though store traffic continues to be challenging, the technology and design innovation that we are seeing from the brands is helping to deliver value in the eyes of the consumer, even as average selling prices are likely to rise higher," Samuels wrote in a note. "Finish Line is sitting in the sweet spot of a very strong product cycle, both in basketball and running. Perhaps the most encouraging sign to us that this lightweight running trend can continue is that all of the major brands have bought into it," he continued. Finish Line has a strong balance sheet and is a potential LBO target, which should limit potential downside to the stock, Samuels said. Investors are worried about the company's M&A pipeline. Finish Line hasn't had a very reputable track record with acquisitions or new concepts. But Samuels believes management will be sympathetic to these concerns and take a more thoughtful and conservative approach this time around.
DSW ( DSW) has grown its sales and earnings over the past four years at a compounded annual rate of nearly 10% and 50%, respectively. While much of this growth has been driven by trends in fashion and athletic footwear, management also should be given some credit. With Chief Executive Michal MacDonald at the helm, DSW has done a good job of emphasizing its value message and building brand awareness through marketing and customer loyalty programs, Samuels noted. DSW recently merged with Retail Ventures, helping it to simplify its corporate structure and benefit from some tax saving. "It is rare these days to find a domestic retailer with room for much additional square-footage growth, but DSW plans to ramp up to a mid-single digit growth rate," Samuels wrote in a note. DSW it testing stores in smaller markets, which could help to drive sales. "Opportunistic pre-buys of fall merchandise, selective price increases on fashion items and continued growth in higher-margin private label business and accessories should help mitigate some cost pressure in the back half," Samuels said. DSW raised its full-year outlook earlier in the month following its first-quarter report. It now foresees earnings in the range of $2.65 to $2.80 a share, with same-store sales increasing in the mid-single digits. DSW ended the most recent quarter with about $7.50 per share in cash and no debt. While the company intends to invest in its stores and infrastructure, Samuels said management may also return some of it to shareholders in the form a dividend. >>To see these stocks in action, visit the 6 Footwear Stocks to Kick Inflation portfolio on Stockpickr. - Reported by Jeanine Poggi in New York. Follow TheStreet.com on Twitter and become a fan on Facebook.