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By Sam Stovall The S&P Footwear subindustry index recently jogged back into the S&P Industry Momentum portfolio for the first time since May, 2003. No surprise there, given the group's impressive 51% climb year-to-date through Nov. 28, vs. a 22% gain for the S&P Super 1500.
This group is followed analytically by S&P's Yogeesh Wagle, who's slightly positive on its investment outlook. Wagle feels that with much of the future sales and earnings growth of leading players expected to come from overseas, the performance of both Nike (NKE
; recent price, $63) and Reebok (RBK
; recent price, $40), which dominate this subindustry index, should continue to depend greatly on international demand. Another important factor, notes Wagle: the relative strength or weakness of the U.S. dollar compared with various foreign currencies.
Wagle's near-term outlook for the subindustry has improved based on a recent mild recovery in athletic-footwear sales. Companies have benefited from a "retro" fashion trend, with consumers demanding classic-styled shoes. Running and basketball shoes have been strong sellers in the first half of 2003. Additionally, the dollar's protracted slide vs. the euro has boosted results, as footwear makers expand in Europe.
CASUAL SHIFT. Wagle notes that Nike is broadening its distribution channels (including the Internet), providing exclusive products for various athletic-footwear retailers, and introducing new products. He thinks Reebok should benefit from new products and sports licenses with the National Basketball Assn. and the National Football League. S&P expects consumer spending will be bolstered by an improving economy in 2003's second half and into 2004, which should likely drive shoe sales.
Athletic footwear is making a comeback, Wagle believes, more in the low- to moderate-price categories than the marquee segments. Price deflation, although moderating, continues to be a concern for the industry.
The nonathletic segment has been experiencing a major shift away from dress to casual shoes, mostly due to the more casual dress environment of the workplace. S&P expects this segment to continue to face challenges, as manufacturers compete against less expensive imports. With lower price points, Wagle believes domestic manufacturers will continue to seek cheaper overseas sourcing, to improve operating efficiencies, and to build brand loyalty.
Wagle's top choice in the group is Nike, which he ranks 4 STARS (accumulate) with a 12-month target price of $71. Reebok carries a 3-STARS (hold) rating, with a 12-month target price of $44.
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 industries in the S&P 1500) as of November 28, 2003.
S&P STARS* Rank
Casinos & Gaming/Consumer Discretionary
Harrah's Entertainment (HET
Computer & Electronics Retail/Consumer Discretionary
Best Buy (BBY
Computer Storage & Peripherals/Info. Tech.
Storage Technology (STK
Consumer Electronics/Consumer Discretionary
Harman International (HAR
Diversified Metals & Mining/Materials
Phelps Dodge (PD
Newmont Mining (NEM
D.R. Horton (DHI
Internet Retail/Info. Tech.
Internet Software & Services/Info. Tech.
* 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