Watch Out Footwear Investors, Winter Was Worse Than Last Year

The warmer-than-expected weather and lower store traffic have softened retail demand for the U.S. footwear industry. This is negative for companies such as Boot Barn Holdings Inc

Columbia Sportswear Company

, Deckers Outdoor Corp

, Rocky Brands Inc

, VF Corp

and Wolverine World Wide, Inc.

. VF is expected to release its quarterly earnings on Feb.19 and Wolverine will announce its financial results on Feb.23. Investors would look for sales figures and comments on demand metrics. According to a footwear survey released by B.Riley: • Winter was especially weak much worse than last year • Though clearance levels improved from end of Dec. to end of Jan., retailers still worse off than year-ago • Boots performed much worse than a year-ago • Dansko/UGG hottest brands for winter in survey; given warm weather, UGG not as strong as year ago Apart from weather, a stronger dollar is also hurting sales for retailers. In October, Moody's cut the outlook for the US apparel and footwear industry to "stable" from "positive" as sales and earnings take a hit from the stronger dollar. "While the hedges taken this year will partially protect margins, the strong US dollar will continue to have negative foreign currency translation effects on the industry's gross profits for the rest of this year," said Scott Tuhy, a Moody's Vice President - Senior Credit Officer. "The strong dollar has discouraged spending by tourists to the United States, impacting sales at brands such as Ralph Lauren and Calvin Klein, dragging on apparel sales." Moody's expects constant currency operating income growth to weaken to 3 - 5 percent in 2016 from 5 - 7 percent in 2015 as hedges at favorable rates roll off. The rating agency thinks the industry will be challenged to fully raise prices to offset higher costs at current exchange rates, which will result in overall industry margins falling around 40 basis points in the next year. However, the industry's overall revenue growth will remain at a moderate 4 – 6 percent through 2016 as companies see returns on their investments in direct-to-consumer and international markets. On the other hand, the athletic footwear industry grew 8 percent in 2015, generating $17.2 billion and marking one of the best performances the industry has had in a number of years, according to The NPD Group. Unit sales grew by 3 percent and average selling price by 5 percent, to $61.15. This is a positive read-through for companies such as Nike Inc

and Adidas AG.