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Are Shoemakers Putting Their Best Foot Forward?


Footwear and apparel analyst Scott Krasik sees potential in names like Skechers and Deckers, but has some concerns for other companies. He believes underwear maker Hanes Brands is also well positioned for more gains ahead.


Kate Stalter: Today's guest on the Daily Guru is Scott Krasik, apparel, footwear, and specialty retail analyst at BB&T Capital Markets.

Scott, there have been some upside price moves among some of the apparel, retail, and footwear stocks, now that we're in earnings season. But we're also rapidly approaching the back-to-school shopping season. Give us the big picture of what you're seeing out there, in terms of this part of the retail sector.

Scott Krasik: I think most of the recent big moves in the stocks have had more to do with that the worst-case scenario didn't unfold, rather than particular strength in the sector. Summer, the second quarter in the summertime, is usually a tough period for apparel and footwear stocks. You don't get back-to-school until the end of July.

So, for example, you've seen 20% moves in stocks like Steve Madden (SHOO) and Crocs (CROX). I think the, biggest reason for those was just that things weren't as bad as people feared.

As we look at back-to-school, I think the expectation-at least the survey reports that have come back-has been positive. People are going to spend more money. Footwear and apparel always gets its share of that. I think this is a unique time in footwear, because athletic and non-athletic casual footwear are working.

Apparel is a little tough to say. Over the last few years, more of the money in a consumer's wallet has gone to footwear over apparel. Colored denim was strong in the spring, and probably will pick back up in the fall, but it seems like footwear will still garner the majority of the young consumer's market share.

Kate Stalter: There are a few names out there that, for a time, were prominent growth favorites, and have kind of fallen from grace. One in particular: I'm looking at the chart for Deckers (DECK) right now, as we speak. What's your forecast longer term for some of these particular names?

Scott Krasik: Deckers just reported earnings last week. I think their results were actually a little bit better than people expected. Right now, the big question is, what's the underlying strength of the UGG brand? We came off of a winter in 2011 that was warm, and the seasonal purchases that people make just didn't happen, and it was affected by that.

The UGG brand was up double digits in the US in the spring, so there is some underlying strength to the brand I think that people weren't expecting. But at the end of the day, UGG classic boots-which are a cold-weather category-they've been around forever. So they're more a replenishment item than a fashion item.

There's really some concerns of how strong the demand will be for those boots this year. We think, assuming more seasonal weather, which you usually get in the wintertime, we think that UGGs are going to get their fair share of people's minds and wallets.

We have a stock price target of, I think, $67 for Deckers, so we see upside from here. But until it gets cold, I think there are still going to be a lot of questions on investors' minds.

Kate Stalter: Crocs is another name that I understand you cover. This is one of those that seem to go through these boom-and-bust phases, at least at terms of when you're looking at the stock performance. It had that notorious, huge decline back in 2007, and then we had another one almost exactly four years later, just a few months back, and it is continuing to trade below its 52-week-high. What are you seeing in terms of that company? That's one a lot of people love to hate.

Scott Krasik: They do, and I think a lot of investors just won't touch it at this point, given their track record. But in general, they've done a pretty good job moving past their clog heritage. I think clogs last quarter were only about 45% of their sales. So they have successfully introduced new styles.

They have exposure to Europe and Asia. Only about 40% of their sales come from the United States. So there's exposure to macro weaknesses all over the world, not just in the US. In Europe, they're struggling right now. Asia was good last quarter, but not as strong as it has been, and I think there are questions around the long-term growth of the company.

I think management has controlled what it's had to. Expenses have been in line; the gross margins have been strong. Their inventories have been well controlled. So it's a matter of demand. It's already a big brand and I think, to really work, they need to extend either into more a fall/winter season, to create product that will resonate for that, or really execute the turnaround in Europe.

But, you know, right now there are still some unanswered questions. We like to say this story still has some hair on it, but it's pretty attractively valued here, and I think it's being priced that it's not going to work. So if they are successful in their turnaround, I'm sure the stock has some upside from here.

Kate Stalter: Now, another one is Skechers (SKX), which as many of our listeners may know, had some issues with some of the claims about these fitness shoes. What's happening with that company right now?

Scott Krasik: They paid a fine relative to the advertising claims, brought by the FTC, and they settled their shareholder lawsuits. But, you know, they've really moved on. They've created new products closer to their core $40 to $60 price point.

As I opened with today, athletic is still very, very strong, and these new shoes that they have-they're in the stores now, but it's going to be a big push in spring of 2013-they're lightweight. They're sold at their core distribution of JCPenney (JCP) and Kohl's (KSS) and Famous Footwear, and they do a pretty good job on the fashion side.

That's what Skechers is known for -- for doing color right -- and if they can get a nice bottom -- and in this case, it's a lightweight sole, made out of something called Resalyte. They put a lot of uppers on it, different colors, and their customers really like that.

So we expect that sales will continue to grow in the back half of this year into next year. The stock has already traded up ahead of it. We think it might have gotten ahead of itself a little bit, but I think its worst days are behind it, and inventory is clear, so there are certainly brighter days ahead.

Kate Stalter: Scott, we're talking about some of these footwear companies that you cover, but there are some other names that people may know that you cover as well. Hanes Brands (HBI) and, of course, True Religion (TRLG), some of these higher-end jeans that people like to laugh about how expensive they are. Say a little bit about some of these other apparel companies before we wrap up.

Scott Krasik: So, in a tricky tape, I think the more discretionary items, where you're counting on people maybe to trade up into a category that they can't necessarily afford, isn't the right place to invest. So, we have a hold rating on True Religion.

Hanes, on the other hand, underwear. Everybody needs underwear. This is a company that's had major headwinds over the last year to 18 months because of higher cotton prices. They start to anniversary those, and input cost becomes a tailwind, starting in the fourth quarter, they've really solidified their market share at Wal-Mart (WMT) and Target (TGT). They've even been able to take the brand upmarket-which is very difficult to do-to the department stores.

So, we like the underwear classification. Again, it's less discretionary. People need to buy it. At back-to-school, you'll see a lot of the promotions in the category, which will drive people to make purchases, and they get that margin tailwind over the next year or so. So, we like Hanes brands here. True Religion a little bit less.

Kate Stalter: Just to wrap up today, an overview over the entire sub-sector of apparel and footwear. What can investors expect, looking ahead?

Scott Krasik: Well, I think it's a question of, in apparel certainly, will the apparel companies that we follow and the retailers that we don't follow, will they benefit fully from lower cotton over the next couple of years? Or will they have to give that back in pricing and will that impact their margins? I think that's the biggest issue for apparel companies.

In footwear, you have some difficult comparisons, given the strong run in this last footwear cycle, really since 2008. People have bought a lot of shoes over the last four or five years. The fashion is still there. But will there be pricing compression to try and drive additional purchases? Do people feel like they have enough shoes in their closet?

So, interesting times. There are always going to be winners and losers. We think at least this year, though, there's still some room for the footwear companies to outperform.

Editor's Note: This article was written by Kate Stalter of MoneyShow.

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