Is It Time to Sell This Sector?

Running a 24-hour live chat for charity last week was fun and helped a good cause. It also provided a good snippet of what is on the minds of investors in The Motley Fool community.

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.

Inventory issues
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.

Step off
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.

More sole-related Foolishness:

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Sean Williams does not own shares in any companies mentioned in this article. He would prefer it if you didn't refer to him as the sole man after this article. You can follow him on CAPS under the screen name TMFUltraLong. Nike is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 30, 2010, at 2:05 PM, tamar1 wrote:

    Well, you dislike Crox the whole year round, and yet it prooved you were wrong! Ok, you don't like the designe, but the stock preformed great. You can say you were wrong from time to time, can't you?

  • Report this Comment On December 30, 2010, at 4:19 PM, KIRA1922 wrote:

    Buffet says buy what you know. Have you ever bought & worn a pair of Crocs? They are fantastic, even in winter...on the beach, working in the yard, running errands around town. Talk to medical workers who wear them year around at work. Great product with broad, ageless demand; fad interest is insignificant.

  • Report this Comment On December 30, 2010, at 7:54 PM, p2i wrote:

    Skechers has inventory problems? Their inventory is all current model inventory. Their American wholesale customers just got over-optimistic with orders and then cancelled. Their sales will hold up just fine. Over $5 per share in cash and no debt.

    K-Swiss looks like it's about to turn around sometime in the next few quarters. Stock price is going up in anticipation.

    Nike is always overpriced. Nobody should expect miracle sales and earnings growth in such a large company.

    CROX have their own little nitch.

    Heelys are just an annoying toy. You can't call them shoes.

  • Report this Comment On December 30, 2010, at 8:06 PM, TMFUltraLong wrote:

    p2i,

    You got me laughing with the Heely's comment,

    I'm just pulling words from the horses mouth with Skechers. They claimed their own downfall recently is inventory woes. If there are no buyers, then there are no buyers and you have a glut of inventory with no recourse to get rid of it.

    K-Swiss is part of my perma-failures list - they never seem to have anything going correct for longer than 6 months consecutive.

    TMFUltraLong

  • Report this Comment On January 09, 2011, at 9:34 AM, flashdonsr wrote:

    Who makes the UGS boots/shoes? A better

    possibility?

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