Data indicates that comparable store sales across all footwear retail industry in US market have decreased in the past 2-3 years primarily due to slowing down store traffic as a result of changes in shopping pattern and changes in macro-economy. The pressure of sales spreads along value chain of the industry quickly to manufacturers/wholesalers in 2016/17 and continued to 2018 for some of sectors. We see more stores closures in department stores and mall-based stores and shrinking margins due to promotions and markdowns. However, after entering 2018, there is a signal indicating that the decline may be hitting the bottom and sales are rebounding driven by strong consumers’ demand and less competition resulted from massive closures of stores.

Sector’s current, trend, causes behind trend, and future

Current and Trend

• There is an apparent downward pressure on sales of companies all alone the value chain of footwear industry in US market since 2015 as indicated by the declining sales in wholesales and comparable stores all across this industry (except for the big names of sport wear products). However, it seems, since the second half of 2017 and driven by strong consumers’ demand, the decline trend had firstly slowed down and re-bounced as indicated by companies’ increasing ability to raise price in both wholesale and retail channels, probably.
• Data indicate that there is an apparent difference between international market (Euro and Asia) and US market, in terms of the trend and timing of sales performance of both wholesalers and retailers in footwear industry, in the past three years. It seems that, currently, it is still only the US market to encounter trouble while we expect Euro market will follow. And the better performance of sport wear in international market has been the major reason that the sport wear companies were impacted insignificantly in 2016/17.
• According to data, generally, the downward trend in the whole retail industry has had less impact on footwear companies than on apparel ones as indicated by the less decrease in sales and less need for promotion and markdowns among footwear companies.
• The extent to which the unfavourable industry climate impacted wholesalers and retailer of footwear varies among different categories. It seems that branded sportswear (average annual increase of 5-10%) presents better performance than men & women’s casual/lifestyle footwear. Women’s shoes sales performance better than men’s. The premium and more recognized brands performance better than value priced and private label product.
• Lowering price has been used as main method for companies to deal with slowing down traffic but it seems that the elasticity of price in footwear industry is strong compared with apparel industry.
• Unlike apparels, online sales growth in footwear industry has not been playing the same important role, as it did in clothing industry, in offsetting slowing store traffic and in bringing sales number back on track.

Causes behind the trend

There are always some common reasons behind the general downturns in the retail industry but the impacts are different due to the difference in products such footwear and apparel.

Changes in shopping pattern/selling pattern

1. General changes in shopping pattern of consumers/selling pattern of manufacturers will not impact the demand as whole but stores traffic. Increasing alternative distribution channels such as online sites, massive merchandises and warehouse dilute the traditional stores traffic and cause decline in transaction/sales volume of retail stores.
2. In this situation, while demand still exists and keeps strong some of demand inevitably moves away from current distribution system and current manufacturers because e-commerce, with the lower barriers to entry, creates accessibility for consumers to products of more small manufacturers and retailers that would have no chances to compete, in traditional shopping/selling pattern, with big companies or retail chain due to disadvantage of scale. The products that they make are usually not premium products and have overlap with those that have been selling in mid-tire department stores/mall-based stores. This explains why department store’ traffic decline significantly and why the decline in sales of current major footwear companies primarily come from their non-premium and less recognized brands and private label products.
3. The shifting of consumers’ shopping pattern to online, causing less traffic in the stores, will negatively impact demand because occasional purchasing resulted from temporary decision that consumers used to do when they shop in the stores significantly decreases due to less visits of stores. However, the decrease in temporary purchasing decision has bigger impacts on apparel than footwear since people usually buy more additional clothing than shoes. This explains why slowing down stores traffic has less impact on footwear industry and apparel industry.

Changes in monetary policy and pressure of price

Quantitative easing monetary policy has largely boosted inflation in products’ price by increasing consumers’ spending in the past ten years. However, as Fed ended quantitative easing policy and started to raise interest at large pace, there is a strong downward trend on products’ price due to decreasing spending of consumers. In this situation, sales decreased inevitably either due to decreased volume if companies do not lower selling price or due to decreased price when they lower price with no increase in volume. While center banks in Euro and Asia will follow the pace of Fed to raise interest there is going to a delay and the delay of monetary policy explains the different performance in retail sales between international markets and US market in the past several years. 

Changes in lifestyle of consumers

Increasing popularity of sports among consumers, especially among female consumers, can help explain why sports footwear has been less impacted than others by unfavourable industry climate.

Increasing consumers’ demand driven by macro-economy/purchasing power or the increasing marketing spending stimulated by money saved from the tax act of 2017 or increasing traffic in third party platform or reduced competition due to massive closure of stores and thus possibility to raise price may be playing the role in rebounding sales in 2018.

Industry Future

Whatever the reason is, this trend of retail traffic may not cease soon and may spread from US to all of other markets as consumers increase their online shopping and other governments raise interest rate as a result of Fed’s action.

Compared with impacts from changes in consumers’ shopping patterns and selling pattern of manufacturers, the future of current companies in footwear industry may be determined to larger extent by the monetary policy of government because it is obvious that shoes are more needed when they are worn out than clothing.

Online sales, due to lower price than in stores, will grab more traffic from in-stores sales. This trend may be accelerating as improved leverage of shipping expenses as a result of booming online sales. Stores based business will be shrinking.

General Financial Performance of Companies In the Sector

The average growth in comparable stores sales of typical retailers in this sector has been down from 1.5% to 0% since 2015. It seems the extent to which this downward trend has influenced on companies’ sales varies depending on products. Premium footwear products seem to have been less impacted. However, when demand (transactions) comes back as we have seen in the first half of 2018, those who were influenced deeper seem to be re-bouncing faster. Comparable sales increased about average 6-7% in 2Q of 2018 just a reflection of increasing transactions and higher price/fewer markdowns as traffic come back.

When facing the downward pressure in traffic before 2018, companies have tried to maintain their sales by either acquisition or expansion of stores. Many of them had to lower price. As companies’ comparable sales bouncing back, while still struggling with wholesale, they have seen improved margins in 2018. The typical gross margin is about 42% (excluding distribution and occupancy costs) and 29% (including distribution and occupancy costs). With average SG&A as percentage of sales of 30%, the average operating margin is about 6% in 2018 (12 months trailing data).

According to our analysis, the current companies’ enterprise price/EBI ratio is around 20 with interest/EBI ratio of 8%.

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