by Alyssa Oursler | November 28, 2012 12:15 pm
If you ask just about any consumer which brand — Steve Madden (NASDAQ:SHOO[1]) or Crocs (NASDAQ:CROX[2]) — is “in,” most would go with the former high-end fashion name.
A report by Goldman Sachs (NYSE:GS[3]) yesterday, though, has headlines saying the exact opposite[4].
Apparently, colorful foot plastic is cool again.
Analyst Taposh Bari gave Crocs, along with athletic retailer Foot Locker (NYSE:FL[5]), a “buy” rating. Deckers Outdoor (NASDAQ:DECK[6]) — maker of Uggs — Wolverwine Worldwide (NYSE:WWW[7]) — responsible for Payless, Sperry’s and more — and Finish Line (NASDAQ:FINL[8]) were all rated “neutral.”
Steve Madden was saddled with a “sell.”
Most notably, Bari said that investors have misinterpreted Crocs and Deckers as “broken fads”[9] when they’re really long-term lifestyle brands.
Investors were soon to reinterpret that on the heels of his 63-page analysis, of course. CROX and DECK climbed 10% and 3%, respectively.
If I were you, I wouldn’t fall for it.
For one, even though Crocs is adding new styles and growing, I find it hard to believe it will ever outrun the stigma that comes with its eye-sores of shoes. Being subject to changing trends like Steven Madden is one thing, but having Facebook pages[10] and Tumblrs[11] dedicated to hating you is another.
On top of that, the fact investors think it’s a broken fad is reason enough to stay away. They might have changed their minds for now, but any evidence to the contrary will send them running — just as it did after the company’s last earnings report.
Oh, come on. Don’t tell me you’ve already forgotten. Just a month ago, Crocs crumbled on the heels of a not-so-hot Q4 outlook despite rocketing growth in Q3[12].
Consumers aren’t the only fickle ones when it comes to fads; investors can be just as quick to turn.
Heck, back when the shoes were (for some reason) popular, investors pushed the stock up around $66. Now, it’s worth less than a quarter of that — even after yesterday’s bump, it still sits at just more than $13.
Of course, that also supports the argument against Steve Madden. Just because its shoes are cool right now doesn’t mean it’s a buy. The company could very easily see its 30% year-to-date gains erased at the slightest sign of changing tastes[13]. Plus, it trades at the richest forward P/E (nearly 14) of all the aforementioned picks.
So, what about Finish Line and Foot Locker?
Bari, for one, said he liked Foot Locker because of its “stickier male consumer base.” I have little issue with his positive sentiment — it’s the reasoning I’m stuck on. Many guys are just as picky when it comes to Nike’s (NYSE:NKE[14]) latest pair of Jordans as any female shopper. Plus, women like athletic shoes, too.
To me, the appeal is that Finish Line and Foot Locker aren’t the ones making the shoes, but simply the ones selling them. Certain athletic shoes might fall in and out of favor, but athletic shoes in general will always be in. The same goes with fashion shoes[15]. That’s why you might be better off snatching up shares of DSW (NYSE:DSW[16]), which sells Steve Madden shoes, rather than Steve Madden stock itself.
Bari also adds that he expects Foot Locker to increase its dividend (currently yielding 2%) by 10% across the next two years. Finally — a compelling argument.
While some of the reasoning in the report may be questionable, there is something to be said for each of Bari’s picks. Foot Locker has an advantage as a retailer and comes with possible dividend hikes. Crocs is a bargain. Steve Madden could be out just as quick as Deckers could be back in (Uggs was one of the most-searched terms[17] on Cyber Monday).
The bottom line is that shoe stocks essentially are fashion stocks, and fashions come and go. In the end, shoemakers remain at the hands of fickle shoppers and just-as-fickle investors.
Which means if you decide to throw in with CROX, SHOO or the like, do so with caution and keep your eye on the tape. It could change in a hurry.
As of this writing, Alyssa Oursler did not own a position in any of the aforementioned companies.
Source URL: https://investorplace.com/2012/11/shoe-stocks-watch-your-step/
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