S&P's investment outlook for the Footwear index is slightly favorable for the near to intermediate term, according to Yogeesh Wagle, the S&P analyst who follows the group. With much of the leading players' future sales and earnings growth expected to come from overseas, the performance of both Nike (NKE
) and Reebok (BRK
) should continue to depend greatly on international demand and on the relative strength/weakness of the U.S. dollar compared with various foreign currencies.
The Footwear index heavily depends on Nike and Reebok, and S&P's near-term outlook for the group has improved based on a mild recovery in athletic footwear sales. Additionally, notes Wagle, protracted weakness in the U.S. dollar vs. other currencies could prop up results at Nike and Reebok, as these geographically diversified players continue to expand overseas. Nike is broadening its distribution channels (including the Internet), providing exclusive products for various athletic footwear retailers, and introducing new products. And Reebok should benefit from new products and sports licenses.
HIGH-END SLIPPAGE. Still, S&P finds no significant signs of a sustainable, general fashion trend back to athletic footwear after years of price promotion. Wagle believes that a likely contraction was avoided by recent discounting and by consumers' bargain hunting. Also, the analyst says recent feedback from athletic specialty channels indicates better turns in inventory in the low-to-moderate price categories compared to the marquee categories. Thus, S&P's outlook for the athletic segment remains cautious.
The nonathletic segment has seen a major shift away from dress to casual shoes, mostly due to more relaxed workplaces. Wagle expects this segment to continue to be challenged, as manufacturers compete against less expensive imports. Major inventory liquidations were recently concluded by Kmart and Ames. With lower price points, Nike and Reebok must keep seeking less-expensive overseas sourcing while they improve operating efficiencies and implement effective marketing plans.
Wagle's top pick in the group is Reebok, which carries an S&P investment ranking of 4 STARS (accumulate). Nike is ranked 3 STARS (hold).
Industry Momentum List Update
For regular readers of the Sector Watch column, here's this week's list of the 11 industries in the S&P Super 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the 116 industries in the S&P 1500) as of April 17, 2003.
S&P STARS* Rank
Consumer Electronics/Consumer Discretionary
Harman International (HAR
Distillers & Vintners/Consumer Staples
Constellation Brands (STZ
Fertilizers & Agricultural Chemicals/Materials
IMC Global (IGL
Household Products/Consumer Staples
Procter & Gamble (PG
Internet Software & Services/Information Technology
Metal & Glass Containers/Materials
Office Electronics/Information Technology
Philadelphia Suburban (PSC
* S&P's stock appreciation ranking system for the coming 6- to 12-month period: 5 STARS (buy), 4 STARS (accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell). Stovall is chief investment strategist for Standard & Poor's