It's no surprise that the market has rallied to new multiyear highs with 85% of S&P 500 companies reporting earnings thus far that meet or beat expectations. Unfortunately, not every stock or every sector can lay claim to this abundant success.
A sector that has been a shoo-in -- or should I say "shoe-in" -- since the market low is the footwear sector. Crocs (Nasdaq: CROX ) -- with its hole-filled rubber shoes -- was written off for dead ages ago and Deckers Outdoor (Nasdaq: DECK ) , which retails the Ugg and Teva brands, worried investors that its products would be too seasonal. Until recently, both have proven the skeptics wrong and have outperformed the rest of the footwear sector by a wide margin -- but times are changing.
No pep in their step
Things are beginning to unravel for shareholders of Deckers Outdoor after the company projected weaker-than-anticipated second-quarter results. Deckers Outdoor has been expanding like wildfire into Europe and has focused on rolling out countless new designs to avoid the stigma of being only a seasonal company, but all of this has come with a price. Having a great line of brands is meaningless if it doesn't translate into bottom line profits -- and the most profound recent trend at Deckers has been rapidly rising expenses. These widening costs and a $50 million revenue deferral caused Deckers to guide to a loss of $0.25 next quarter compared to an expectation of a profit of $0.05.
Crocs ran into similar problems with its quarterly report. Despite beating current quarter expectations by revamping its product lines and lowering inventory levels, Crocs' forecast fell $0.01 shy of the consensus. In Crocs' defense, the company had some very lofty expectations baked into its forecast, but I feel it's fair to say that the company has not escaped the "fad" label just yet.
As if poor guidance from these two weren't bad enough, Skechers (NYSE: SKX ) also reported results that came in significantly below expectations and warned that moving its high levels of inventory continues to be challenging.
It's the inventory, stupid!
I'd hardly call this the end of the footwear bull, but now more than ever inventory levels need to be carefully monitored. Heelys, Crocs, and Skechers are no strangers to the inventory sinner group. Trendy designs are no longer going to be enough for shareholders -- they want tangible results.
We still have a long way to go this earnings season, but I wouldn't be the least bit surprised to see more traditional footwear names Nike (NYSE: NKE ) and Foot Locker (NYSE: FL ) outperform. Both companies have a long history of prudently managing their inventory levels and sport a diverse product mix that one-trick wonders Heelys and Crocs just don't have. Only time will tell if these companies can deliver, but if they don't, someone better prepare a "don't tread on me" banner for this sector in the not-so-distant future.
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