Sector financial performance:

This company, who primarily designs, manufactures,  markets, and sells outdoor, worker, former, and lifestyle footwear and as well apparel through wholesale and as well through retail/ecommerce sites, has been grouped into outdoor& worker footwear (wholesale/retail) sector in footwear industry.

The demand for outdoor and worker (industrial and construction) footwear from companies’ retail customers seems to have been very weak due to slowing down store traffic/unusual weather in the past several years. However, the wholesale sales of the typical company of this sector generated a 5% increase in the first half of 2018 compared with 6% decrease prior year.

The decreasing demand from retail customers between 2015 and 2017 obviously gave huge pressure on price so that we saw the average selling price had kept going down and caused shrinking of gross margin (32% in 2017 for typical company data). The generally improved SG&A as percentage of sales as a result of cost-saving efforts to some extent offset the decayed margin. A typical operating margin is 4% in 2017. However, as demand rebounded as indicated by increasing wholesales and less markdown, gross margin and operating margin were improved to 33% and 6% in 2018 according to typical company data.

According to our analysis, the current companies’ enterprise price/EBI ratio is about 21 with interest/EBI ratio of 6%.

                                                                                                    click for more about this industry

Company performance:

It seems that unfavourable industry climate in this sector has a significant impact, between 2015 and 2017, on companies in this sector as indicated by the average double digit decrease in wholesales of those companies. At the same time, warmer than usual weather also has contributed to the decrease in sales. The continuous decrease in wholesale seems to pause in 2018 as indicated by an increase of 5% for the first half of 2018. The growth trend in retail sales continued in 2018. However, this company continued to lose military contracts.

The first six months of fiscal 2018 compared with 2017

Net sales decreased 1.6% (0.4% for 2Q) primarily due to decrease of about 35% in military sales offset by increase of 5% (7.3% for 2Q) in wholesale. Retail sales gained growth of about 8%.

The fiscal 2017 compared with 2016

Net sales decreased 2.7% primarily due to decrease of about 5.5% in wholesales as a result of discontinuation of private label work. Retail sales gained growth.

The first nine months of fiscal 2017 compared with the same period of 2016

Net sales decreased 3.6% primarily due to decrease of about 9% in wholesales as a result of discontinuation of private label work. Retail sales gained growth.

Fiscal 2016 compared with 2015

Net sales decreased 3.4% primarily due to decrease of about 15% in wholesales as a result of warmer weather and slowing of retail stores. Retail sales were flat.

Fiscal 2015 compared with 2014

Net sales decreased about 6% primarily due to decrease of about 12% in wholesales as a result of warmer weather and slowing of retail stores. Retail sales increased.

Its gross margin has decreased by about 200 basis points between 2014 and 2017 to 31.6% of fiscal 2017(trailing 12 months) primarily due to decreased average selling price offset by discontinuation of private label program. However, because the decrease in gross margin has been offset by the decrease in its SG&A as percentage of sales as a result of cost-saving efforts of this company its operating margin still decreased by about 150 basis points to 4% in 2017. However, as this company was able to reduce markdown of its products when wholesale rebounded, its gross margin was improved to above 33% in 2018 and generated an operating margin of about 6%.

Stock price

This stock currently has an enterprise price/EBI ratio of 21. We think that its stock is being relatively overvalued considering uncertainty of demand growth and sustainability of cost-saving of SG&A.