Don't let it get away!
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That being said, one question in particular that stuck with me was regarding my thoughts and opinions on Skechers (NYSE: SKX ) . The more I thought about my answer, the more I realized that the entire footwear sector might be setting itself up for failure.
One problem that seems to derail numerous companies within this sector is inventory issues. Skechers might seem like the bargain of the year in this sector because of its forward price-to-earnings ratio of 8.5, but it's all smoke and mirrors unless you look at the inventory levels.
Inventory is all about making sure the right products are on the shelves for customers, otherwise excess inventory will lead to deeper discounts to move the unwanted product and considerably lower margins. Skechers recently became a victim of having the wrong product mix and could see its profit expectations erode even further.
Another habitual offender is K-Swiss (Nasdaq: KSWS ) , whose own chairman said results over the past few years have been "dismal." K-Swiss' margins have taken a big hit from closeouts and deep markdowns -- signifying just how poor its product selection has been -- which has resulted in a couple of years of losses.
Is this a fad?
Retail consumers are incredibly fickle, and shoes in particular have very little staying power in consumers' minds unless there's a big celebrity name or strong advertising behind them. Heelys (Nasdaq: HLYS ) fell victim to a fickle consumer and was exposed as being nothing more than a passing fad in 2007 and 2008.
Likewise, Crocs (Nasdaq: CROX ) is in serious danger of the fad label despite returning to profitability. So far Crocs has rebounded and proven investors wrong, but I doubt its designs have staying power. Fad investments could mean quick profits, but they rarely provide value for long-term investors.
Priced for perfection
Even if footwear companies have staying power, and have proven that they can control inventory levels, overcoming the "priced for perfection" stigma could be a problem.
Take Nike (NYSE: NKE ) , which recently reported what seemed like stellar second-quarter results and subsequently got hammered by forecasting lower future margins due to higher material costs. Nike is still growing revenue more than 8% per year, but at over four times book value and a price earnings to growth ratio nearing 2, investors aren't as willing to forgive any negatives.
Footwear companies are having far more issues than I would care to deal with if I were an investor in this space. With the market in year-end rally mode, it might be time to step away from some of these companies before they burn a hole in your pocketbook in 2011.
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