3 Surefooted Footwear Companies

Transparency Market Research recently released a report on footwear that predicts the global market will grow at a CAGR of nearly 2% between 2011 and 2018, reaching $211.5 billion. It characterizes the market as experiencing sustainable development with the key drivers being consumers' preferences for innovative designs, the trend of more active lifestyles, rising population, and higher disposable income levels. 

As its name implies, a tough competitor
Wolverine Worldwide (NYSE: WWW  ) is a leader in the branded casual, active lifestyle, work, outdoor sport and athletic footwear and apparel markets. Its well-recognized brands include Hush Puppies, Wolverine, Keds, Sebago, and Sperry Top-Sider.   

The company achieved record third quarter revenue of $716.7 million, an increase of 103% compared with revenue from the same quarter last year. Much of the increase was attributed to the integration of the brands it acquired in 2012, including Sperry Top-Sider. Even with that revenue not included, growth was still an excellent 9% compared to the previous year.

Earnings before taxes were $73.4 million, compared with $44.9 million in the third fiscal quarter of 2012. This increase was primarily due to the effects of higher revenue and a nice 70 basis point gross margin improvement.

Offsetting these positives was a 180 basis point increase in operating expenses as a percentage of revenue. If the company had managed to keep the expense percentage constant, an additional $12.6 million would have fallen to the bottom line. 

CEO Blake W. Krueger described the company's earnings performance as "phenomenal." I'm not totally in agreement with that because earnings before income taxes as a percentage of revenue fell to 10.2% from 12.7% a year earlier.

I would say that Mr. Krueger and his team made a phenomenally smart acquisition and brilliantly leveraged the Top-Sider name by introducing the Sperry products into 67 new markets. Top-Siders are the boat deck shoes that were very popular 30 years ago and now are undergoing a tremendous renaissance among diverse demographics. The brand has achieved double-digit revenue gains for 16 consecutive quarters.

A colossus growing stronger with each quarter
Nike (NYSE: NKE  ) is the world leader in designing and marketing athletic footwear, apparel and equipment for both serious and recreational athletes in a wide variety of sports. It recently reported revenue of $7 billion -- for just one quarter. This was a solid 8% increase over last year.

A gross margin of 44.9% was 120 basis points over last year as the company's product mix shifted to higher-margin goods. Selling and administrative expenses were virtually unchanged. The result was a whopping 33% increase in net income to $780 million.

What accounts for this continued success? We may think of Nike as a marketing superstar, and rightfully so, but its success is also due to product innovation. In fact, Fast Company named Nike the "No. 1 Most Innovative Company of 2013." Nike's product development team is increasingly venturing into technology, such as the FuelBand product, an electric bracelet that helps the wearer track performance measures such as calories burned and steps taken during the day. 

Bringing fashion to the great outdoors
Deckers Outdoor  (NYSE: DECK  ) develops and markets fashion-oriented footwear for both casual lifestyle wear and for outdoor recreation. Their popular brands include UGG and Teva, which was the first popular sport sandal product.

Deckers reported tepid second-quarter results, but management was not concerned, and even raised full-year revenue guidance to an 8% increase over 2012, compared to the previous projection of 7%. The company now sees diluted earnings per share increasing 8% compared to the previous expectation of 5%.

In the second quarter ended June 30, sales were down 2.5% year over year. The UGG brand -- accounting for nearly 60% of sales -- dropped 6.9%. Teva sales were down even more--8.4% compared to the second quarter last year. Lower sales to wholesale customers caused the weakness.

Bright spots were the 29.1% jump in sales at the company's retail locations, as 36 new stores opened, and a 34.2% increase in Deckers' e-commerce business. A detail that troubled me was that same-store sales dropped 5.3% compared to last year's second quarter, but the company said unfavorable weather negatively affected sandal sales, which are typically highest in the first and second quarters of the year.

What we learned
In the recent conference call, Wolverine CEO Blake Krueger said, "The past 12 months have been the most transformative period in the company's 130-year history." The revitalized popularity of Top-Siders should have a spillover effect to Wolverine's other brands and help the company maintain its grip on profitability, despite the slippery and sometimes stormy economic conditions in the U.S. 

The limit to future growth for Nike is its sheer size. Adding another 8% of sales growth for a quarter will require selling more than half a billion dollars worth of additional products. The company's ability to innovate is not a fluke, it is embedded into the company culture. The only thing that could slow Nike down is if the global population abruptly decides to quit playing sports.

Deckers Outdoor has two powerful brands, but my one reservation about the company is its fashion orientation -- which is both a strength and a potential weakness. This company seems more subject to the whimsical shifts in consumer taste than the other two. But, investors won't lose their footing with any of these three brand name powerhouses.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.


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