Footwear Stocks: Tread Carefully

The industry sneaks into this week's Relative Strength rankings -- but S&P's analyst has some reservations

By Sam Stovall

Listed below are the industries with the highest S&P Relative Strength Ranking of "5" (sub-industries within the S&P Super 1500 that posted six-month price performances that were in the top 10% of all 115 sub-industries) as of Aug. 10, 2001.

Five of the industries are from the Consumer Discretionary sector. One of them -- footwear -- started its turnaround just after the Federal Reserve Board began its rate easing cycle. But Maureen Carini, the S&P analyst who covers the footwear industry, remains cautious on the group.

Why? Carini says S&P's near-term outlook is tempered by concerns about weakness in domestic sales of athletic footwear, as well as the impact of negative foreign exchange rates.

However, companies continue to look for new ways to boost sales. Carini notes that Nike is broadening distribution channels through additional stores and the Internet, providing exclusive products for various athletic footwear retailers, and introducing new products. She thinks Reebok should benefit from new products, as well as storeowners giving its products more shelf space so as not to become overly dependent on Nike. Future orders have been modest, though, as retailers have been cautious to minimize future markdowns and vendors are carefully monitoring retailers.

Overall, S&P remains cautiously optimistic about long-term growth prospects for the leading athletic footwear makers, according to Carini. Nonetheless, she says there are no significant signs that suggest a sustainable, general fashion trend back to athletic footwear.

Meanwhile, Carini says the non-athletic footwear segment has been experiencing a major shift away from dress to casual shoes, mostly due to the more casual dress environment of the workplace. The struggle for the non-athletic footwear industry will continue as manufacturers compete against less expensive imports. As price points trend lower, domestic manufacturers will have to increase less-expensive overseas sourcing, improve operating efficiencies, and implement effective marketing plans. Carini thinks those companies that execute these points well should enjoy above-average sales and earnings growth.

Sub-Industry Company S&P STARS Rank
Auto Parts & Equipment Superior Industries (SUP)
Auto Parts & Equipment
Construction & Farm Machinery PACCAR Inc. (PCAR)
Construction & Farm Machinery
Environmental Svcs. Waste Management (WMI)
Environmental Svcs.
Footwear Reebok Inc. (RBK)
Health Care Facilities HCA Inc. (HCA)
Health Care Facilities
Home Furnishings Mohawk Industries (MHK)
Home Furnishings
Home Improvement Retail Home Depot (HD)
Home Improvement Retail
Metal & Glass Containers Pactiv Corp.(PTV)
Metal & Glass Containers
Specialty Stores Barnes & Noble (BKS)
Specialty Stores
Trading Cos. & Distributors Fastenal Co. (FAST)
Trading Cos. & Distributors
Water Utilities Amer. Water Works (AWK)
Water Utilities

Sam Stovall will be on vacation next week. Sam Stovall's Sector Watch will return on Aug. 27.

Stovall is Senior Sector Strategist for Standard & Poor's

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