Sector financial performance:

This company, who primarily designs, develops, markets, and sells athletic footwear, apparel, and equipment mainly through wholesale and as well through retail/ecommerce sites, has been grouped into sports footwear (wholesale/retail) sector in footwear industry.

The demand for sports footwear, especially those big names, seems to be very strong as indicated by the average growth in organic sales of more than 10% in the past several years in this sector. The growth presents consistency between wholesale and retail of those companies and as well among different geographic areas. However, increases vary among brands as indicated by the fact that more recognized brands have had better performance. Online sales increased quickly.

After the second half of 2017, sales in US market seemed to have experienced downward pressure for most of companies in this sector but their global sales were offset by stronger increase in their European and Asian market.

Sales’ shifting to higher price products (probably from international market) is considered as a sign of strong demand, which enables companies in this sector to pass increased products costs to final customers, and as well the driver behind the improved gross margins (48% for 2018) for most of companies in the past several years. The improved SG&A as percentage of sales as a result of leverage of increased sales help companies lift their average operating margin to about 10% from 8% of 2015.

According to our analysis, companies’ enterprise price/EBI ratios fall between 29-47 with an average 38 and an average interest/EBI ratio of 6%.

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Company performance:

It seems unfavourable retail industry climate- especially department store in US market may have been impacting the wholesale sales of this company’s product. However, the influence has been limited among its non-core brands. The demand for its core brand has kept strong and, to some extent, offset the decrease in sales of other brands as indicated by the slowing down, but still keeping above positive, growth of sales in wholesale and retail globally for this company. The performance presents consistency among footwear and apparels. Sales in US market decreased in 2017/18 but offset by strong increase in international market.

The fiscal 2018 compared 2017(ended 20180531)

Net sales (excluding currency) increased 4% attributable to international market. Sales decreased in North America.

Retail sales (30% of total revenue):

Growth in comparable stores sales (store only): 4%.

Growth in e-commerce: 25%

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

Net sales were flat but fluctuated among different brands.

Retail sales (30% of total revenue):

Growth in comparable stores sales (retail): 5%.

Growth in e-commerce: 19%

Fiscal 2017 compared with 2016

Net organic sales (currency impacts excluded) increased 8% primarily attributable to its core brand products (both in footwear and apparels)

Retail sales (28% of total revenue):

Growth in comparable stores sales (retail): 7%.

Growth in e-commerce: 30%

Fiscal 2016 compared with 2015

Net organic sales (currency impacts excluded) increased 12% primarily attributable to its core brand products (both in footwear and apparels)

Retail sales (26% of total revenue):

Growth in comparable stores sales (retail): 10%.

Growth in e-commerce: 51%

Its gross margin has decreased by about 200 basis points from 2014 to 2017 to 44% due to the combined impacts from increasing products costs of its core brand, lower retail price, and changes in foreign currency but offset by increasing average selling price for its core brands wholesale. 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 quick increase in sales its operating margin still stay at 13.5% in 2017.  Gross margin slid slightly in 2018 due to continuously declining retail price, together with increased SG&A% as a result of increased expenses, dragged down operating margin to about 12% in 2018.

Stock price

This stock currently has an enterprise price/EBI ratio of 47. We think that its stock is being relatively overvalued considering that US market may still be factor to drag down its sales and margin. Ratio of 47 is too high to its peers.