Men’s shoe industry is declining. While this trend is seen on many fronts, there are certainly exceptions to this ruling, and most shoe companies appear to be holding up well within the lagging US economy. Those that are doing fine might or might not be so in the near future.
The state of men’s shoe industry today
Special to FashionIndustryToday.com
May 2, 2008
By Eric J. Leech
Hoovers describes the overall state of the Men’s shoe industry as declining. Currently we are looking at approximately $25 billion annual revenue for the US fashion industry, with a small individual company (less than 100 employees) taking in a modest average of $10 million. Today, there are approximately 100 large industrial manufacturers, 1,500 wholesalers, and 30,000 retail outlets to sustain the entire industry with shoes. Many of small companies serve as manufacturers for the larger name brands who prefer to source their products through independent manufacturers. These small manufacturers have been able to compete successfully with larger companies by producing a quality shoe.
With leather averaging 50% of the cost of most shoes, many companies have been forced to turn to a less expensive alternative to production, namely outsourcing to other countries. Currently, domestic manufacturing costs have fallen below $3 million annually, since outsourcing to countries such as China, Italy, Brazil, and Spain, offers a much better price per handmade shoe.
Automation has yet to take over the factory worker, so there is still the necessity for multiple skilled craftspersons to cut, glue, and stitch each individual shoe and labor is substantially less in these countries. This is a deadly trend however for the small domestic shoe manufacturer here in the US, but what makes this even worse, is the weakening of the dollar, which is beginning to reduce the cost savings shoe companies used to enjoy.
While this trend is seen on many fronts, there are certainly exceptions to this ruling, and most shoe companies appear to be holding up well within the lagging US economy. One thing that we must consider when discussing the state of men’s shoes, is that athletic shoes remain one of the most popular consumer products, taking 30% of the entire retail market. Men’s casuals and dress shoes take-up only 15%. This will become important as we look through a couple key 2008 earning reports from such leading companies as Nike, Adidas, Reebok, Weyco, Brown Shoe, and Rocky Brands.
It would indeed appear that the entire fashion industry is in for a bit of a crunch over the next two to three years, but most companies are not being affected by the slumping economy as much as some would have guessed. To use the word slump is almost an understatement as many economists predict “recession-like” conditions for the US over the next several years, which will translate to rough times for many businesses. Economist Jorgen Elmeskov, head of the OECD (Organization for Economic Cooperation and Development), has said that the US GDP (Growth Domestic Product) is in for a 0.1% rate of growth through the rest of the first quarter of 2008, then turning to 0% for the second. As we reach 2009, the prediction extends to continued rough times with a GDP of 0.8% and unemployment reaching close to the 6% mark in the US.
With so much of the fashion industry wounded by the current economic times it is hard to fathom a shoe company actually experiencing record breaking sales, but that is exactly the case for Nike. On February 29th of this year, Nike released their financial results of the quarter with an amazing revenue growth of 16%, which translates to $4.5 billion. This is compared to the $3.9 billion seen last year during the same quarter. Nike has attributed this progressive growth with a recent strategy they adopted to strengthen their bond with the consumer by offering the most innovative and exciting products to the consumer as possible.
Instead of focusing on pure numbers, Nike has listened to the consumers wants and needs, placing them in the core of every decision that they have made over the past twelve months. Nike has boasted a worldwide yearly revenue of $23 billion by the year 2011, and looking at their current results to date, this is not a far fetched goal. Currently in the US, Nike footwear has increased its revenue to $177.9 million, which is 16% over last years.
While Reebok cannot boast the same success, Adidas, the world’s second largest manufacturer of shoes under Nike, has also reported a reasonably strong outlook for the next year despite poor economics in the US. Predictions have been based off of a sharp 17% incline of orders for Adidas products in the foreign market, due to the Euro 2008 Soccer championships and Beijing Olympics. While Reebok has been part of the Adidas empire ever since it was bought out in 2006, it has so far failed to integrate to the strength of the Adidas market and it is currently 8% below last year.
The foreign market success rate by Adidas is however not shared by the US market, who has reported being 20% down on sales. Some of this decline should of course be attributed to the fourth quarter shut down of many Footlocker stores, which caused the unforeseen mass canceling of thousands of orders. Nike was also part of the retailers affected by this, although its affects appeared to be minimal compared to Adidas and Puma.
Of possible concern for these shoe manufacturers who are doing well in the foreign market, is the possibility of the eventual filtering of poor sales into these foreign markets, due to the poor US economy. European economies will not be affected in the short term, as they are predicted to receive 0.5 GDP growth over the next two quarters, but down the road, Elmeskov has suggested that a “credit crunch” may indeed take hold of the healthy European economy and put a damper on their overall market trend. As much as the European fashion powerhouses hate to admit, the US economy is pivotal to much of the fashion economy in more ways than one, and men’s shoes will be no exception. We begin our look into the smaller segment of men’s dress and casual shoe market with Rocky Brands, Inc., home of such recognized brands as Georgia Boot, Gear, Durango, Dickies, and Michelin.
Revenue for Rocky Brands was down this quarter from the $61.7 million last year, to a slightly disappointing $60.5 million this year. While disappointing, this was actually in line for what was forecast in past quarters. Despite the overall slowing trend for dress and casual shoes, Rocky Brands has noticed a double digit increase in sales by both the men’s work/safety shoe line of Lehigh and Dickies. They are hoping that this is a sign that they will be able to regain lost profitability over the next few quarters, especially now that they have decreased their overall production costs. Weyco Group, known for their line of Men’s dress and casual shoes under the name brands, Florsheim, Stacy Adams, and Nunn Bush, has produced a positive earnings report for this most recent quarter. While not as impressive profit increase as Nike, Weyco has found itself up 5% from last years $221 million to this years $233 million.
Weyco attributes much of their increased revenue to a new “non-third party” license agreement they have to distribute their Florsheim brand in Canada. But beyond this, Florsheim has also seen a modest increase of 4% in the US markets. Weyco reported lagging retail clothing sales, but an overall positive outlook towards their footwear line. Nunn bush sales in the US were fairly flat, but their Stacy Adams brand was able to pickup a 5% increased in revenue through various National shoe chains and department stores. Weyco has a strong position in the market currently with a low debt and high cash availability. They were able to open five new stores in the US, while only closing one. They upgraded 70% of their stores, and currently have 39 locations in the US and two in Europe. While in general the US economy hasn’t had a significant impact on Weyco, they have admitted to feeling cost pressures overseas as the dollar has gradually become weaker.
Brown Shoe represents the dress/casual shoe, and also the e-commerce market. They are recognized by Dr. Scholl’s, Famous Footwear, and Shoes.com. Brown Show also was able to report a positive revenue increase of 2.7% this quarter to $14 million, compared to last years $13.6 million. Brown shoe noticed an impact of the loss of consumer spending towards the last quarters of 2007, but reacted appropriated with markdowns and promotions to continue to boost sales and move their inventory. With all signs looking good for their future, Brown Shoe opened another 110 Famous Footwear stores.
For 2008 however, Brown Shoe intends to take the first few quarters for cautiously and wait to see how the market moves before making any drastic moves or decisions. For their e-commerce site, Shoes.com, there was a slight decrease in revenue of 1.3% versus one year ago. Much of this decline was seen from a poor fifty-third week for Shoes.com, which if eliminated from the calculations, tells a different story of a moderate 4.4% increase over the year before. All in all Brown Shoes in prepared for a crunch in the Men’s shoe market, but they are confident if they watch the market and act accordingly to stimulate consumer interest, they should be in a good position once the US economy begins its upturn, hopefully within the next three to five years.
There is no reason for the state of the men’s shoe industry to cause any panic, as there is no evidence that the market is going to do any serious long term damage, especially to the company who remains cautious over the next three years. Both athletic and dress/casual shoes are showing moderate increase in revenue, thanks to a little help from the foreign markets. All in all, the market is stable for the moment and should remain so. Hopefully the foreign markets can continue to thrive as the US economy recovers itself, or we could see some additional downturns in the Men’s shoe market, but it will be several quarters from now before anything like that could happen.[]
Eric J. Leech is a business writer at FashionIndustryToday.com.