Shoe Companies On A Run

By Matthew McCall | April 19, 2010 AAA

The retail sector has been strong in 2010 as evidenced by the S&P Retail Index rallying 14%. There is a niche area within the retail and apparel sector that has been flying under the radar. The footwear makers and footwear retailers have been able to put together a sustainable rally and, even at elevated levels, are attractive as investments.

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The Swipe
The behemoth of the group is Nike (NYSE:NKE), with a market capitalization of $36 billion. The company best known for its athletic sneakers also has apparel lines and, of course, the golf division that is led by the sponsorship of Tiger Woods. The stock recently closed at a fresh all-time high and pays a dividend of 1.4%. Fundamentally the stock is not the growth story it once was, with earnings per share of $3.81 in 2009 and estimates of $3.84 in 2010 and $4.32 in 2011. The stock is trading at a P/E ratio just under 20 based on 2009 earnings and 17.4 based 2011 earnings. The number is not overly high, however, compared with the growth. I feel the stock has limited upside in the near-term.

Not So UGGly
Not as much of a household name is Deckers Outdoors (Nasdaq:DECK), the company behind the Teva sandals, Simple shoes, and UGG boots. In recent years the company has experienced strong sales based on the explosion in popularity of the sheep-skin UGG boots that are one of the top sellers every holiday season. DECK reported blockbuster earnings in late February that sent the stock from $100 to $140 within one month. Throughout the global recession, DECK did not experience an annual drop in earnings and continued to grow. Their earnings per share are expected to come in at $9.47 in 2010 and $10.54 in 2011. Based on the 2011 numbers, the stock is trading with a P/E ratio of 13.5 and growth of about 11%. I would consider DECK more attractive than NKE, but not a screaming buy. (For more, see Getting On The Right Side Of The P/E Ratio Trend.)

If the Shoe Fits
Two more "hip" shoe companies that I found interesting are Sketchers US (NYSE:SKX) and Steve Madden (Nasdaq:SHOO). There is one major difference between the two companies. From 2007 through 2009 the earnings at SKX were on a decline. At the same time, the earnings at SHOO were increasing and, similar to DECK, did not decline during the global recession.

After the three difficult years, SKX is poised to more than double earnings in 2010 to $2.61 per share, from $1.16 in 2009; by 2011 the expectations are for earnings of $2.94. SHOO will continue it steady growth from $2.73 per share in 2009 to $3.23 in 2010, and $3.64 in 2011. Based on 2011 earnings SKX has a P/E ratio of 13.2 and SHOO is at 14.8. The question is whether you would prefer the steady growth of SHOO or the erratic, yet explosive growth of SKX.

Far From Finished
There are three notable names to cover in this niche sector. The one that concentrates on the athletic side of the business is Finish Line (Nasdaq:FINL). The company was chosen due to its continued earnings growth through the global recession and the future projected growth. The company has about 680 Finish Line stores in 47 states and sells sneakers such as Nike and Adidas. Earnings per share in 2009 came in at 55 cents and they are expected to soar in the next two years to $1.06 in 2011. The stocks P/E ratio based on 2011 is 16.0, but with growth well above that number, the stock is currently undervalued.

Cheap Shoes
The other two shoe retailers are low-end/discount shoe stores, Shoe Carnival (Nasdaq:SCVL) and Collective Brands (NYSE:PSS). Shoe Carnival operates about 305 stores of the same name in 30 US states and offers everything from brand-name women's shoes to kids athletic sneakers at a discount. Earnings at SCVL are increasing from 43 cents in 2009 to $1.59 in 2011. With a P/E ratio of 15.4 based on 2011 and high growth, SCVL is attractive at current levels.

You may recognize PSS as Payless ShoeSource and Stride Rite, considering they have nearly 5000 stores by the name. Earnings are not expected to increase at such a dramatic pace, but from 2009 to 2011 they will rise from $1.08 to $1.68. A P/E ratio of 13.6 based on 2011 is attractive - there could be a case to buy PSS along with SCVL.

Bottom Line
In the end, there are several ways to play the shoe boom that range from the stocks of shoe makers to shoe retailers. Within this sampling, investors can look at athletic, discount, and so on. Who would have guessed such a small niche sector would offer so many unique investing opportunities? (For more, see The Value Investor's Handbook)

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