Can Apparel and Footwear Manufacturers Keep Your Portfolio Fashionable?

Within the consumer-products sector, apparel and footwear manufacturers would seem a fairly safe bet for investors because most Americans purchase new clothes and shoes each year. Statistics from the American Apparel & Footwear Association released early this year show the average American bought 62 garments and seven pairs of shoes in 2012.

But even though the worst of the recession is becoming a distant memory, executives of apparel and footwear manufacturers still use words like "tepid" to describe the consumer spending environment. It's in that light that we take a look at Columbia Sportswear (NASDAQ: COLM), Deckers Outdoor (NYSE: DECK  ) , and Wolverine World Wide (NYSE: WWW  ) .

Uncertain footing in the third quarter
Columbia Sportswear manufactures apparel and footwear designed to protect outdoor enthusiasts from the elements and keep them comfortable as they enjoy sports such as skiing, hiking, and fishing.

One of Columbia's competitive advantages is its ability to innovate, providing its customers with both style and better functionality. For example, the company markets boots that as its marketing slogan says help you "take on Old Man Winter with a touch of class."

The company's third-quarter results, released in late October, reflected the challenging consumer environment. Net sales decreased 4% compared to the year-ago quarter. The declines were most pronounced in the Latin America/Asia Pacific segment where sales dropped 15%, and in the U.S., which saw a 7% decline.

By product category, footwear sales, which declined 18%, caused the negative variance for the company as a whole. Apparel, accessories, and equipment sales were almost unchanged compared to the same quarter of 2012.

A near 2% increase in selling, general, and administrative expenses, combined with the decline in sales, resulted in a 12% reduction in operating income year over year.

Good news from abroad
Deckers Outdoor markets footwear for both casual-lifestyle wear and for outdoor recreation under brands such as UGG and Teva. 

In the second quarter of 2013, the company reported lackluster sales, down 2.5% year over year. In the third quarter ending Sept. 30, however, sales rebounded somewhat, increasing 2.7% compared to the same period of 2012. Each of the company's three major brands achieved modest sales increases.

The company's international segment delivered a strong performance for the quarter, a sales increase of more than 10% year over year. Deckers' e-commerce business is not large, only about 4% of total sales, but its 12.2% growth for the quarter is worth noting.

The company also reported an excellent 34.5% increase in sales from its retail stores, due to 37 new stores being opened compared to the end of last year's third quarter and a 1.9% increase in same-store sales.

Deckers improved its gross margin percentage by 90 basis points, but selling, general, and administrative expenses as a percent of sales were up 4.6 percentage points. The marginally higher sales combined with these cost factors resulted in a 22% drop in income from operations for the quarter.

The new Keds on the block
Wolverine World Wide owns well-known footwear and apparel brands including Hush Puppies and Merrell.

The big story for Wolverine in the past year was its acquisition of the Sperry Top-Sider, Saucony, Stride Rite, and Keds brands. The company's new 16-brand portfolio delivered a more than 100% increase in revenue for the third quarter compared to last year.

Comparing sales on a pro forma basis, assuming the brands had been part of the company last year, revenue growth was still a solid 9%.

The company reported double-digit revenue increases in a number of brands, including Merrell, Sperry-Top Sider, Saucony, and Keds.  

Sales momentum was global, with double-digit revenue growth in the Latin America, Asia Pacific, and Europe/Middle East/Africa regions.

The gross margin percentage improved 70 basis points year over year. However selling, general, and administrative expenses as a percentage of revenue rose 150 basis points due to costs associated with developing its consumer-direct business and other brand-building efforts, resulting in a decline of 110 basis points in operating profit percentage. Operating profit in dollar terms was up $40 million, or 86%, due to the effect of the added brands. 

What we learned
Columbia's CEO Tim Boyle said in the earnings release that the company's strategies to get back on a sales growth track include "reinvigorating" wholesale channels and improving seasonal-product assortments. The company's profitability for the quarter was actually better than management expected due to efficient cost-control efforts.

In Deckers' case, management believes full-year revenue will be up about 8% and raised its expected increase in diluted earnings per share over 2012 to 10%, up from a previously projected 8%.

Columbia too revised its full-year outlook upward, saying net sales will be down just 1.5% for the year. The company is pleased with its ability to manage costs and deliver profitability even with weak sales growth.  

Regarding these two companies, I'd just say that cliffhangers sometimes bring us unexpected surprises.

At the recent ICR XChange conference, Wolverine CEO Blake Krueger discussed the company's accomplishments and goals. A few points regarding the company's strengths really stood out:

  •  First, Wolverine's 1,000 years of accumulated brand equity. The Keds brand for example has been around since 1916.
  • Wolverine's presence in 200 countries; success is not dependent on the economic growth of any one region.
  • The company's products appeal to all ages and both genders. Its diversified mix of brands protect the company from the often unpredictable changes in fashion trends.
  • The strategy of adding product categories to its brands to expand from footwear brands to lifestyle brands -- with the potential to sell more than shoes to each customer.
  • And Wolverine's considerable marketing creativity. The company updated the Keds brand by having massively popular recording artist Taylor Swift be the brand spokesperson, presenting the products as fashionable and fresh, not familiar and tired.

With this in mind, Wolverine is my favorite of the three companies.

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