Sector financial performance:

This company, who primarily designs, sources, markets, and distributes lifestyle-active&casual and performance footwear for men, women, and children mainly through wholesale and as well through retail/ecommerce sites, has been grouped into lifestyle footwear (wholesale/retail) sector in footwear industry.

There is an apparent downward pressure on US market sales of companies in this sector as indicated by their domestic wholesales. As we see from our data, the average growth in sales (US market mainly) has been weak (growth rate at 0% and -5% in 2017 and 2016) compared with 6% growth in 2015, which is consistent with situation in the whole retail industry of US market. The decrease has been reflected in decrease in sales volumes while reduced largely selling price (in most of cases) from both companies’ wholesales, as a result of decrease in demand from their retail customer such as department stores, and companies’ own retail. The decrease in domestic market seems to have been offset partially by strong growth in the international market as indicated by an average 20% annual growth in wholesale of international market during the same period.

Sales seem to be rebounding since the second half of 2017 and continued into 2018 as indicated by an average 3% growth in 2018 for those companies’ wholesale in US market. Data indicates that sales volume seems to be sensitive to reduction in price, which may mean that demand is getting stronger, especially from online purchasers.

Before 2017, when companies generally used method of lowering price to boost decreasing sales, it seems demand for footwear was weak but did not go away as indicated by the relatively strong economy elastic of price. Therefore, due to sales’ rebound quickly after promotion and markdowns the average selling price did not go too deep. Plus, strong performance of some companies in international market, which have higher gross margin, helped these companies to keep gross margins uncontaminated. However, the SG&A as percentage of sales increased for most of companies as a result of currency and store closure’ impacts and thus companies’ operating margins decreased slightly. However, after entering 2017 due to strong demand online and stronger economy elastic of price, sales (volume) rebounded quickly and improved largely margin of companies in this sector.

The current average gross margin is 47% in this sector (depreciation and store costs excluded) with an average SG&A as percentage of sale of 38%. And this makes an average operating margin of about 9%.

According our analysis, companies’ enterprise price/EBI ratios are average 23with interest/EBI ratios of 4%. 

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Company performance:

The domestic demand for this company’s footwear seemed to have been decreasing in 2015/16 as indicated by slowing down growth in domestic sales. However, the demand from international market seems to have been strong. After 2017, it seems that while international demand keeps strong the domestic demand also picked up as indicated by sales increase in 2017 and 2018.

The first three months of fiscal 2019 compared with 2018(ended 20180630)

Organic net sales increased about 18% primarily attributable to increase of about 22% in international sale and increase of 17% domestically driven by increase in sale volumes.

The fiscal 2018 compared with 2017(ended 20180331)

Organic net sales increased about 6% primarily attributable to increase of about 12% in international sale (volumes) and increase of 3% domestically.

The first six months of fiscal 2018 compared with the same period of 2017

Organic net sales increased 5.5% primarily attributable to increase of about 13% in international sale (volumes). Domestic sale is flat.

Fiscal 2017compared with 2016

Net sales decreased about 4.5% primarily attributable to decrease in domestic sales (6.4%) and international sales (1%). Those decreases reflect decreases in both volume and selling price.

Fiscal 2016 compared with 2015

Net sales increased about 3.2% primarily attributable to increase in domestic sales (4.7%) and international sales (0.6%).

This company’ gross margin was about 47% in 2016 down from about 48% of 2014 (depreciation and stores occupancy costs excluded). Decreased gross margin, together with significantly increased SG&A% dragged its operating margin from 12% to about 6%. However, since 2017, as reduced markdown and lower supply costs and leverage of expenses as a result of increase in sales, its gross margin was improved to about 49% and operating margin back to 12% in 2018.

Stock price

This stock currently has an enterprise price/EBI ratio of 23. We think that its stock is being relatively slightly undervalued considering the sales growth in 2018.