While flipping through the rolling 12-month relative strength charts for the nearly 140 subindustry indexes in the Standard & Poor's Composite 1500 index (consisting of the S&P 500, S&P MidCap 400, and S&P SmallCap 600 indexes), the S&P Footwear subindustry index chart popped out to me as a possible longer-term top-out situation. The group's relative strength first broke below its 39-week moving average back in the fourth quarter of 2007, as the U.S. equity markets braced for an impending economic slowdown.
The group recovered a bit in the 2008 first quarter, only to "kiss" the moving average and then head lower, possibly indicating further weakness ahead. During 2007, this subindustry index rose 22.8%, vs. a 3.5% advance for the S&P Composite 1500 index. Year to date through May 9 the subindustry index fell 6.7% while the broader market declined 5%.
Take a look at the accompanying chart. As a reminder, the jagged blue line represents the subindustry index's rolling 52-week price performance, compared with the 52-week performance for the S&P 1500. Any point above 100 indicates market outperformance over the prior year, while points below 100 indicate market underperformance. The red line is a rolling 39-week moving average, while the four bands indicate one and two standard deviations above and below the group's long-term, mean relative strength.
Fundamental Outlook: Neutral
There are eight large- and midcap companies in the S&P 1500 Footwear index, yet only two are covered analytically by S&P equity analysts: Nike (NKE) and Timberland (TBL). Jason Asaeda follows these issues for S&P. His fundamental outlook for the footwear subindustry is neutral. He thinks prevailing consumer spending trends in the U.S. are likely to ease in coming months. International sales have been an increasing part of many U.S. companies' revenue mix, he notes, and foreign economies that are experiencing accelerating growth may serve to mitigate softness in the U.S.
The U.S. footwear market reached $44.4 billion in dollar sales in 2007, a 1.6% increase from 2006, according to estimates from the NPD Group. This represents a slowdown from the 4.5% and 10.9% gains in 2006 and 2005. Total dollars in the casual and dress casual footwear categories increased 0.8% and 2.4%, respectively, while running/jogging shoes lagged, down 3.3% in 2007. These three categories accounted for 57% of total dollar sales in 2007.
Asaeda says that in 2007 athletic footwear specialty stores lost share in dollar sales while sporting goods stores gained share. Sales of leisure/low-performance footwear, such as for walking and other light activities, grew ahead of the overall footwear category. Asaeda thinks these trends were mirrored in retailers' reports that suggest athletic footwear sales have been particularly weak, in a shift to sandals, thongs, and other footwear bought primarily for comfort. S&P anticipates similar sales trends in 2008.
Countering the moderating trend S&P sees in athletic performance footwear, Asaeda expects footwear manufacturers to focus more on brand extensions in the apparel, accessory, and sports equipment categories to boost sales growth.
Consumer spending levels moderated in 2007, says Asaeda, in line with a slowing economy, and S&P anticipates further weakening in 2008.
In S&P's view, many consumers will start to spend an increasing portion of their monthly income on household expenses and debt repayment, leaving fewer dollars to spend at retail. That is not to say, however, that athletic footwear specialty stores will necessarily post losses this year. In the absence of must-have products to drive sales, Asaeda looks for athletic footwear specialty stores to maintain profit margins through conservative planning of inventories and tightly managed expenses.
So there you have it. The group's faltering relative strength, combined with a neutral fundamental outlook, supports S&P's opinion that equity prices will be market performers, at best, in the near term. Of the companies mentioned in this story, Nike carries an S&P investment ranking of 4 STARS (buy), while Timberland is ranked 3 STARS (hold).
Industry Momentum List Update
Here is this week's list of the industries in the S&P 1500 with Relative Strength Rankings of 5 (i.e., price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500), along with a stock that has the highest S&P STARS (tie goes to the issue with the largest market value).
|Subindustry||Company||Ticker||S&P STARS Rank||Price (5/9/08)|
|Agricultural Products||Corn Products||CPO||4||$47|
|Coal & Consumable Fuels||Peabody Energy||BTU||3||$69|
|Construction & Engineering||Fluor||FLR||4||$164|
|Diversified Metals & Mining||Freeport-McMoRan Copper||FCX||3||$114|
|Fertilizers & Agr. Chem.||Monsanto||MON||4||$120|
|HyperMarkets & Super Centers||Costco Wholesale||COST||4||$71|
|Integrated Oil & Gas||ConocoPhillips||COP||5||$89|
|Oil & Gas Drilling||Noble||NE||5||$63|
|Oil & Gas Equip. & Svcs.||Superior Energy||SPN||5||$53|
|Oil & Gas E&P||Swift Energy||SFY||5||$56|
Source: Standard & Poor's Equity Research