Shoe Stocks Are Losing Their Footing

by Alyssa Oursler | October 26, 2012 1:17 pm

Yesterday, shares of shoe-fad stock Crocs (NASDAQ:CROX[1]) crumbled on the heels of a not-so-hot fourth-quarter outlook despite rocketing growth in Q3[2]. Today, shares of  Deckers Outdoor (NASDAQ:DECK[3]) — the maker of UGGs — are following in their footsteps.

The company reported a dismal third quarter in which earnings tumbled more than 25% and sales fell 9%. On top of that, Deckers is now expecting a 14% drop in earnings in the current quarter — quite a difference from the 22% gain it had earlier predicted. Sales are also expected to climb only 6%, down from a previous estimate of 19%.

Shares took a 16% hit by midday as a result, bringing the company’s year-to-date losses to more than 60%.

The shoe struggles don’t end there, though.

Skechers (NYSE:SKX[4]) has been on a similar downward trajectory. The company recently reported a decent quarter with EPS growth of 30% on sales growth of 4%, but the stock has still lost a quarter of its value since late August. And again, Crocs’ recent selloff took it 15% into the red since January.

So, what’s the deal? Consumer spending and confidence are both up of late; why are so many shoe stocks slipping?

To start, while a rebound from the Great Recession may be under way, the three years of struggles have undoubtedly taken their toll. Consumer tastes change. And on top of that, all three companies have learned the hard way that — in the fashion world and the investment world — what’s in one day is out the next.

Crocs, of course, stormed onto the shoe market back in 2007 and the momentum crowd jumped on the trend. Since then, though, the stock has taken quite the tumble: it’s worth just over $12 now vs. a high of more than $66 around peak popularity.

And that’s because, just as investors are quick to jump on board with the next big fashion, they’re also quick to jump out at the quickest sign of a slowdown — as they did with Crocs’ Q4 outlook.

Deckers, for its part, has scapegoated sheepskin and the weather for its recent struggles. As Chairman, President and CEO Angel Martinez put it:

“Over the past two years, we have raised prices on selective key styles to help mitigate the impact of an 80% increase in our sheepskin and raw material costs over this same period. We believe that these selective price increases, particularly during a period of one of the warmest years on record, has pushed us above the consumer’s price-value expectations for the UGG brand.”

While those factors may play a role, the desires of trend-conscious consumers have undoubtedly weighed in as well. Rising prices could be turning customers away, but customers would also probably be a little more accepting of the new sticker if UGGs were the must-have, cool-kid shoes they once were.

As a side note, UGGs aren’t completely off the style map, but their remaining target audience is a younger crowd than it once was. A parent buying a $200 pair of boots for a middle schooler who will grow out of them in a month is not just unlikely, but a bit silly.

The company has even gotten so desperate that it is implementing retroactive price cuts on classic UGG styles. When it comes to shoes, out of style is out of style — slashing the already-raised price tag won’t change that.

The good news for the company, of course, is that it’s more than UGGs. Sales of its outdoor Teva shoes climbed 22%, while the increasingly popular beach brand Sanuk also saw solid 18% gains.

The bad news, though, is that UGGs made up 87% of the company’s sales last year — probably part of the reason Deckers stock has plunged from a peak last year of $117.66 to just $29.71 today.

Skechers — which I’m also not sure were ever that cool, but made for a darling momentum stock[5] anyways — are also seeing red thanks to a single shoe: Shape-Ups. Not only were the fitness-focused, raised workout sneakers less popular than expected, they also have been the subject of several lawsuits — a double whammy for the company.

Its stock has also taken quite a hit since 2011 highs, going from $44 last year to just over $16 even after 33% year-to-date gains.

The moral of these stories is pretty clear: For one, trying on these beaten down stocks is probably not the best idea. Unless one of them stumbles onto the next big shoe fad or their once-cool styles make a revival, there’s little to latch onto.

And even then, investors should always be wary of any niche momentum stocks whose fates lie in the hand of fickle consumers. They may be soaring to gains one day but, before you know it, the style — and the stock — could be so last year.

As of this writing, Alyssa Oursler did not own a position in any of the aforementioned securities.

Endnotes:
  1. CROX: http://studio-5.financialcontent.com/investplace/quote?Symbol=CROX
  2. despite rocketing growth in Q3: http://investorplace.com/2012/10/lesson-learned-the-crocs-fiasco-is-hardly-unusual/
  3. DECK: http://studio-5.financialcontent.com/investplace/quote?Symbol=DECK
  4. SKX: http://studio-5.financialcontent.com/investplace/quote?Symbol=SKX
  5. darling momentum stock: http://wallstreetpit.com/39043-momentum-skechers-usa-skx/

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