As Serena Williams speaks out on the court and Colin Kaepernick continues to cause a media stir, consumers continue to shop for sneakers, sports apparel and footwear. Six leading investment experts and MoneyShow.com contributors highlight some top picks in the specialty footwear marketing and retailing sector.
You may not agree with the decision by Nike, Inc. (NKE) to build an advertising campaign around the polarizing former football player Colin Kaepernick. But without getting into the politics of the company's decision, Nike has been such a strong growth stock for so long, that it's hard for any one decision to irrevocably reverse that trend.
Meanwhile, the upcoming earnings report should be good, with analysts expecting 8.8% earnings growth and 9.3% sales growth. In addition, Nike has been doing business for a long time. There's a reason they're the biggest, most recognizable sports apparel company in the world.
They didn't make this decision blindly. Yes, it's a risk, but you can be sure it was a very calculated risk. Management is betting that the Kaepernick advertising campaign will bring in more customers than it drives away.
There could be some short-term pain, as many Americans have vowed to boycott Nike as a result of its decision. But I doubt a Colin Kaepernick advertising campaign will sink Nike or do long-lasting damage to its brand.
You may dislike everything Kaepernick stands for (or, more accurately, kneels for). And Nike's decision may turn you off from buying Nike stock. But we try and take politics and emotion out of the equation. We prefer to look at the stock's technical chart and the bigger picture. And both of those still look pretty good.
The world's number two sportswear maker, Adidas (ADDYY) is catching up to Nike. The company reported an excellent set of second-quarter results. It increased quarterly sales 4.4% year-on-year to €5.3 billion, compared with €5.2 billion expected by analysts. With the effect of foreign exchange movements stripped out, the increase was a very impressive 10%.
Operating profit in the three months to June was 17.2% higher than a year ago and at €592 million beat analyst expectations of €546 million. Adidas said it is on track to meet its full-year guidance of 10% revenue growth excluding foreign exchange movements, as sales in the two key markets of North America and Asia are increasing at double-digit rates.
Adidas has stayed on top of fashion more than most of its peers. It nicely exploited the "athleisure" trend and is doing well again with its clunky, retro-inspired trainers popular with millennials called "Dad shoes." Innovation also limits the amount of inventory that ends up being sold cheaply on Amazon.
At Adidas, 80% of sales are generated by products that are less than a year old. That gives it strong control over pricing. And while Nike's operating margins at over 12% are still nearly two points higher than Adidas, the German group is catching up fast, thanks to economies of scale from growing sales, higher price points and growing online sales. Its margins should reach record heights this year.
Skechers USA Inc. (SKX) is an apparel company that designs and manufactures affordable footwear for people of all ages. Skechers is the third-largest footwear brand globally, behind Nike and Adidas.
The company reported record second-quarter revenue and gross margins. International wholesale sales rose 24.9% in the quarter and international retail sales rose 12.8%. International wholesale and retail sales represented 51.6% of total sales. Worldwide same-store sales increased 4.5%. CEO Robert Greenberg commented, "We are investing in our international business - both in newer and established markets as we continue to experience strong growth overseas." Skechers remains an incredibly successful and rapidly growing company, with huge ongoing growth opportunities in China and other international markets.
Analysts expect earnings per share (EPS) to fall (1.7%) in 2018 and then rise 15.4% in 2019. There's attractive upside to short-term price resistance at $33. Traders should then sell at $33 and buy again on a subsequent pullback to $31. There's medium-term price resistance at $38, which is likely the best price investors will see this year. I rate the stock a Strong Buy.
Foot Locker (FL) is an athletic footwear and apparel retailer, operating 3,310 stores in 24 countries in North America, Europe, Australia and New Zealand, as well as the popular Eastbay.com and Footlocker.com websites.
Although the company posted EPS of $0.75 in fiscal Q2 (vs. $0.70 est.), investors remain concerned about store traffic, margin pressures due to increased wage expenses and the cost of further digital investment. CEO Richard Johnson defended the results, "Our performance reflects the work we are doing on several fronts to position the company to succeed in a rapidly evolving retail environment."
We think that the negativity isn't deserved, as the company has several competitive edges, including broad distribution channels, geographic locations, multiple banners and product categories. We believe the company will continue to benefit from its strategic cost control and productivity plans, in addition to further penetration of its apparel offerings and solid growth of its digital shopping platforms.
For Q2, FL had sales of $1.78 billion (vs. $1.76 billion est.). Foot Locker spent $93 million to buy back 1.8 million shares during the quarter, yet the company reported $950 million of cash on its balance sheet, with only $124 million of debt (a net cash per share position of more than $7.00). While increased expenses can be a cause of concern, we think investments in staff that can improve the in-store experience and in Foot Locker's digital presence can pay long-term dividends.
We continue to believe that the company's solid cash position, growing online presence and inventory management give us plenty of reasons to hold the stock, while those with limited retail stock exposure might consider picking up Foot Locker shares. After all, our target price now stands at $77. Additionally, we like the strong balance sheet that sports $6.89 of net cash per share, providing operational flexibility and the ability to buy back shares and increase the dividend (yield is 2.9%). Foot Locker also trades for around 10.5 times next 12-month's earnings.
DSW Inc. (DSW) is all about shoes, selling a big portfolio of shoes via a few different value-oriented brands including Shoe Company, Designer Shoe Warehouse, DSW Kids and Town Shoes, as well as selling through franchised international locations and through affiliates.
And, really, the company has been sleepy for a few years -- revenues have advanced 3% to 5% each of the past five years, while earnings have slipped a little bit, leading to a rough few years for the stock. But management has straightened the ship by launching a new rewards program, investing more in digital marketing, containing inventory and revamping the firm's merchandise, and those efforts are paying off in a big way.
In Q2, comparable store sales rose 10% (that metric's strongest showing since 2011), with overall revenue showing a sharp acceleration (to 16%) and earnings (up 66%) crushing estimates. The company is also expecting good things from its recent Canadian acquisition, which should be accretive this year and more so going forward.
It's not a great growth company, per se, but the stock is strong because Wall Street was caught off guard. DSW trades at a reasonable valuation (19 times estimates) and sports a solid 3.1% dividend yield, which, combined with Q2's acceleration, has big investors putting money to work.
The stock was in the market's doghouse for a while, falling from $48 in 2013 all the way to $15 in the middle of last year. It finally entered a mild uptrend in April of this year, rising to $28 in July before chopping sideways for a few weeks. Then came the earnings report, which caused a huge move for a relatively sleepy stock like DSW Inc. -- and the shares catapulted higher by 20% on nearly nine times average volume, and it's held those gains since. Dips of a point or two look buyable, with a stop placed on the shares in the upper $20s.