Sector financial performance:

This company, who primarily designs, sources, markets, and distributes lifestyle-active& casual 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 seems to have been decreasing in the past four years as indicated by slowing down growth in domestic wholesales (down from 22% of 2015 to -7% in 2018 2Q due to decrease in both volume and price) and as well the slowing down growth in domestic comparable stores sales (down from 10% of 2015 to 2% of 2018 2Q). However, the demand from international market seems to be still strong.

The first six months of fiscal 2018 compared with 2017(20180630)

Net sales increased about 13.6% primarily attributable to international wholesale (increased 23%, 30% for 2Q) and international retail (increased 28%).

Domestic wholesales increased about 1% (down 7% for 2Q) due to increase in sales volume offset by decrease in price.

Growth in comparable stores sales (retail, including e-commerce):

 Domestic                                 International                 

4.1% (2.2% for 2Q)         13.8% (11.3% for 2Q)

The fiscal 2017 compared with 2016

Net sales increased about 17% primarily attributable to international wholesale (increased 24%) and international retail (increased 50%).

Domestic wholesales increased about 4% due to increase in sales volume offset by decrease in price.

Growth in comparable stores sales (retail, including e-commerce):

 Domestic           International                 

6.4%              10.1%

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

Net sales increased 14% primarily attributable to international wholesale (increased 20%) and international retail (increased 49%).

Domestic wholesales increased 2.4% due to increase in sales volume offset by decrease in price.

Growth in comparable stores sales (retail):

 Domestic           International                 

4.2%               7.3%

Fiscal 2016 compared with 2015

Net sales increased about 13% primarily attributable to international wholesale (increased 27%) and international retail (increased 43%).

Domestic wholesales decreased 1.6% due to decrease in average selling price offset by increase in sales volume.

Growth in comparable stores sales (retail):

 Domestic           International                 

2.2%               11.8%

Fiscal 2015 compared with 2014

Net sales increased about 32% primarily attributable to introduction of new style and footwear to domestic wholesale (increased 22%), international wholesale (increased 59%) and retail (increased 21%).

Domestic wholesales increased 22% due to increase in sales volumes and average selling price.

Growth in comparable stores sales (retail):

 Domestic           International                 

10%               12.5%

Due to the continuingly decreasing selling price as a result of boosting the sales of domestic wholesales, the gross margin of domestic wholesale decreased in the past two years. Its gross margin for domestic retail also decreased due to the same reason. However, benefiting from strong growth in its international sales, the whole gross margin of this company has increased. This company’ gross margin was about 46.5% up from about 45% of 2014 (depreciation and stores occupancy costs excluded). Increased gross margin, offset by increased SG&A spending due to fast international expansion, push its operating margin above 9% in 2017. Gross margin continued to increase due to sale/product mix to higher margin in 2018. However, due to increased SG&A% as a result of quick expansion internationally, its operating margin keeps no change.

Stock price

This stock currently has an enterprise price/EBI ratio of 17. We think that its stock is being relatively undervalued considering that, while growth slows down, it has provided a much better performance, in terms of its sales from international market and growth in comparable store sales, than many of its peers.

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