Some Spring in Their Step

Though footwear makers, notably Nike and Reebok, have been performing well so far this year, the long term is a little dicier

By Sam Stovall

One group that has gained a toehold in the -- the list of industries with top S&P Relative Strength rankings -- is footwear makers. Year-to-date through Apr. 17, 2003, the S&P Footwear index was up 18.4%, vs. a 1.6% rise for the S&P Super 1500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600 indexes). In 2002, this subindustry index slid 14.2%, compared to a 22.5% decline for the broader market index.

S&P's investment outlook for the Footwear index is slightly favorable for the near to intermediate term, according to Yogeesh Wagle, the S&P analyst who follows the group. With much of the leading players' future sales and earnings growth expected to come from overseas, the performance of both Nike (NKE ) and Reebok (BRK ) should continue to depend greatly on international demand and on the relative strength/weakness of the U.S. dollar compared with various foreign currencies.

The Footwear index heavily depends on Nike and Reebok, and S&P's near-term outlook for the group has improved based on a mild recovery in athletic footwear sales. Additionally, notes Wagle, protracted weakness in the U.S. dollar vs. other currencies could prop up results at Nike and Reebok, as these geographically diversified players continue to expand overseas. Nike is broadening its distribution channels (including the Internet), providing exclusive products for various athletic footwear retailers, and introducing new products. And Reebok should benefit from new products and sports licenses.

HIGH-END SLIPPAGE.

  Still, S&P finds no significant signs of a sustainable, general fashion trend back to athletic footwear after years of price promotion. Wagle believes that a likely contraction was avoided by recent discounting and by consumers' bargain hunting. Also, the analyst says recent feedback from athletic specialty channels indicates better turns in inventory in the low-to-moderate price categories compared to the marquee categories. Thus, S&P's outlook for the athletic segment remains cautious.

The nonathletic segment has seen a major shift away from dress to casual shoes, mostly due to more relaxed workplaces. Wagle expects this segment to continue to be challenged, as manufacturers compete against less expensive imports. Major inventory liquidations were recently concluded by Kmart and Ames. With lower price points, Nike and Reebok must keep seeking less-expensive overseas sourcing while they improve operating efficiencies and implement effective marketing plans.

Wagle's top pick in the group is Reebok, which carries an S&P investment ranking of 4 STARS (accumulate). Nike is ranked 3 STARS (hold).

Industry Momentum List Update

For regular readers of the Sector Watch column, here's this week's list of the 11 industries in the S&P Super 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the 116 industries in the S&P 1500) as of April 17, 2003.

Industry/Sector Company S&P STARS* Rank
Consumer Electronics/Consumer Discretionary Harman International (HAR ) Not Ranked
Distillers & Vintners/Consumer Staples Constellation Brands (STZ ) 5 STARS
Fertilizers & Agricultural Chemicals/Materials IMC Global (IGL ) 5 STARS
Footwear/Consumer Discretionary Reebok (RBK ) 4 STARS
Homebuilding/Consumer Discretionary Lennar (LEN ) 5 STARS
Household Products/Consumer Staples Procter & Gamble (PG ) 5 STARS
Internet Software & Services/Information Technology Yahoo! (YHOO ) 1 STAR
Metal & Glass Containers/Materials Pactiv (PTV ) 4 STARS
Office Electronics/Information Technology Xerox (XRX ) 2 STARS
Trucking/Industrials Yellow (YELL ) 5 STARS
Water Utilities/Utilities Philadelphia Suburban (PSC ) 4 STARS

* S&P's stock appreciation ranking system for the coming 6- to 12-month period: 5 STARS (buy), 4 STARS (accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell).

Stovall is chief investment strategist for Standard & Poor's

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