US Economy Growing Slowly; General Retail Sputters, Sports Shoes Soar

US Economy

• The US economy grew only grew at 2.0% in the quarter ending September 30; GDP growth has been 2.0% or less for three of the last four quarters. While the US is not heading into a recession, weak economic expansion is likely to continue – possibly dragging down retail and shoe sales in the months ahead.

• Surprisingly, US job growth jumped up in October to the highest level this year following disappointingly small increases in the previous two months. Hiring growth fell back in November to the average monthly job growth for the year of about 200,000 per month, a reasonable pace but far below US potential at this stage of an economic recovery. The quality of the new jobs is not encouraging as part-time employment continues to dominate new hires.

• The unemployment rate has fallen to an impressive level of only 5%. However, the percentage of working age Americans actually employed is at a near 50 year low. The pool of workers employed or seeking work continues the decline which began with the Great Recession in 2008; many eligible Americans have just given up looking for work, have retired, gone back to school or taken advantage of the liberal disability payments program greatly expanded under Obama.

• Incomes have continued their steady rise this year, but not much of it is going to general retail sales, which were under heavy pressure in the third quarter. The gain of about 2.5% this year in incomes is not enough to push up inflation.

Consumer

• No product, except perhaps the Apple I-phone, has performed as well as sports shoes in 2015 – just about every brand -- Nike, Adidas, Under Armour, Skechers, and its premier retailer, Foot Locker -- have all recorded spectacular performances.

• Auto sales are on track to be the highest on record this year.

• Real estate sales have been strong all year, and home improvement giants (Home Depot, Lowes, etc.) and house hold formation retailers (Williams Sonoma, Crate and Barrel, etc.) have had a banner year – perhaps helped by falling fuel prices as gasoline at the pump is about $2.00 a gallon in many parts of the country.

• By contrast, in-store sales of all the major better grade department stores were well into the red, on a comparable store basis, for the quarter, as were those for the non-athletic shoe stores. The same pattern characterized the reports of leading apparel and electronics stores. (Same store sales, store-for-store, or comparable store results refer to stores open for at least a year. i.e., excluding ones closed or opened during the year.)

• The mass merchants like Wal-Martfared somewhat better – all in the group reported small, but positive store-for-store sales gains in the quarter that ended October 31.

• Worrisome also is the apparent buildup of inventories among many leading brands including such standout performers as Skechers, Michael Kors and Under Armour. Such stock overhang likely reflects the optimism for the US economy in 2015 that characterized many economic outlooks at this time last year – it is looking more and more that such fulsome predictions have fallen way short of reality.

• The same optimism probably explains why US imports of shoes through the third quarter of this year are up over 5% in units compared to the same period last year.

• Only a modestly successful holiday shopping season is anticipated. Black Friday and Cyber Monday, the kick offs of the holiday season, were slightly above last year’s subdued levels but not that impressive. Holiday buying seems to more or less evenly divided between on line and off line purchases.

• The overstocks could drive a lot of profit eroding discounting in the windup of the holidays -- to clear out stocks.

Outlook

• In sum, the US consumer seems, for the first time in quite a while, to be holding back somewhat on discretionary spending, especially on apparel and shoes (except for athletic items) – perhaps signaling a shift away from the strong sales in that space that has been the case for most the post-recession recovery.

Department Stores – Apparel and Non- sports Shoe Customers Seem Fatigued

• The sluggish buying by better off US consumers that started in the second quarter has worsened in the quarter ending October 31 – all the leading better grade department stores reported dismal results.

• Even Nordstrom, the leader in high quality customer service and higher end merchandise, reported that its full line and off-price stores were both in the red, on a store-for-store basis, 2.2% for the quarter. Its internet sales were up 11%, while its off-price internet site was up some 40%. Overall, the company reported total comparable results of only 0.9% increase for the quarter.

o Nordstrom demonstrates that the key to success for US physical stores is to couple them with a great on line experience and heavy off-price offerings; those who do not are doomed.

• Macy’s, the largest US department store group, accounting for some 40% of all sales in that group, had its third consecutivequarterly negative comp store performance, down 3.6% in the third quarter.

o This company has missed out on the off-price offerings of the key department stores, like Nordstrom Rack and Off Fifth (run by high end leader, Saks Fifth Avenue), but has announced that it will open its own off-price chain, Backstage – maybe a little too late.

• The off-price space in general is ‘hot’. TJ Maxx and its discount sister brands, Marshals and Home Goods – the undisputed leaders in this crowded space -- have had a great year with comp sales up 5% for the first three quarters of 2015. The group is on track to exceed Macy’s in total sales volume for the full year.

o The off-price business in the US is driven by sales of nationally recognized brands at reduced prices.

o The merchandise, however, for the most part is specially made for the discount chain. It is often somewhat different in design, quality, etc., from the same brand offering in the full price department and specialty stores.

 DSW, Famous Footwear, Rack Room, etc., in the footwear space operate on the same principle, as do the ‘outlet’ center stores operated by the apparel, footwear, and accessories brands themselves.

o There are some 200 shopping centers in the US exclusively dedicated to brand ‘outlet’ stores. Nearly every recognizable brand sold in the US has a chain of stores bearing its name in many of these centers.

 Most such centers are located in tourist areas or somewhat outside of major shopping areas. Just try to find a parking place at any one of them on a weekend or in the holiday run up!

• Dillards, the largest regional department store group, declined even more than Macy’s did, down 4.0% on a comparable store basis.

• On the mass-marketside, all the leaders recorded plus performance on a comp store basis.

o Target did the best, up 1.9%, with Wal-Mart recording a decent 1.5% store for store increase and Kohl’s was just about flat with a 1.0% comp store increase.

o Again, while this sector was in the black,the small gains are evidence that there is a cautious consumer at the low end as well as up the price scale.

Shoe Retail and Brands

• Sales for the shoe brands and shoe retailers were just about universally strong in the third quarter of 2015. Sales of sport shoes have been phenomenal all year -- with the third quarter the best so far.

o Footlocker recorded the best results among the retailers, up nearly 9% on a comp store basis, continuing its great run of strong performances; its smaller rival, Finish Line, has not yet reported.

o On the brand side, Skechers once again did phenomenally well, recording more than 27% revenue growth for the third quarter of 2015; amazing considering it had growth of 31% in the corresponding quarter in 2014!

o Under Armour continued its amazing growth, with sales increasing 28% for the third quarter.

 Three quarters of its sales are sports apparel, but its shoe business grew by 61% in the third quarter!

 Its overall, global sales will approach $4.0 billion in 2015 – impressive but still way behind Nike at $30 billion and Adidas at more than $16 billion.

 Still its global revenue grew by more than $260 million in the quarter compared to the same period in 2014; in dollar terms the growth was only slightly less than that reported by Nike at some $300.0 million.

o An amazingly strong plus performance of 17.7% was recorded by adidas, which has had double-digit gains every quarter this year.

 Note that much of this was due to the weakening euro, in which its results are stated; on a currency neutral basis, sales were still up some 13% for the third quarter.

o Nike reported strong sales for its third quarter: global revenues were up 4% (12% excluding currency distortions).

 Shoe sales were spectacular: up 30% in China, 19% in Japan and 12% in the US. On a currency neutral basis, global shoe sales were up 16% for the quarter.

 Overall, Nike’s total company sales increased by more than $300.0 million compared to the same quarter in 2014.

 Unlike Under Armour‘s 75% in clothing, less than 40% of Nike’s total sales are in apparel.

o On the non-athletic side, only Steve Madden, with an increase of 5.5% was in the black, while Brown Shoe wholesale (which changed its corporate name to Caleres) slipped to a negative 2.8% for the quarter, and Wolverine slipped even further with a negative 4.5% decline in sales.

o Self-service, national brand, retailer DSW reported noticeably weaker store- for- store results than for the first two quarters. Its third quarter nearly 4.0% negative same store showing resulted in the CEO being fired -- following a year of disappointing performances.

o By contrast, DSW’s top competitor, Famous Footwear, had a strong 4.4% comp store increase for the third quarter.

o Full service Genesco continued its impressive gains in its ‘funky’ Journey’s stores and in its high end men’s store, Johnson and Murphy, racking up a plus 5% comp store result.

US Sourcing Update

Total imports of shoes into the US in the first nine months of 2015 were strong, growing more than 5% in pairs and 8% in value. Average unit prices wereup just 1% compared with the first three quarters of 2014.

o China’s pairs imported into the US were up by 3.8%, while its market share fell to 77% from 80% compared to the same period in 2014. Unit prices edged down about 0.2%.

o By contrast, shoe imports from China into the European Union (EU) were down 4.6% in pairs through May of 2015. China’s import footwear, market share in pairs was 73%. Overall shoe imports into the EU for the period were up by 3.4% including a 10% increase from Vietnam, which also holds a 10% shoe import, market share in pairs for the EU.

o According to official China export data, total shoe exports through August of 2015 from China to the world fell by 7.9% in pairs, with leather and rubber/plastic shoes each falling over 11% in pairs for the first eight months.

o Vietnam’s shipments to the US grew sharply again, up some 20% in pairs with its market share rising to 13% from 11% compared to the same period in 2014. This reflects

 its lower wage costs compared to China, the continuing shift of sport, ‘ath-leisure’ and outdoor items from China and anticipation of the Trans-Pacific Partnership (TPP), which will confer zero duties on shoes from Vietnam into the other 11 countries negotiating the deal including the US.

• It must be kept in mind that it will be sometime before the zero duties come into effect.

• Under the best scenario (like the US Congress passing the deal before Obama leaves office on January 20, 2017), duties for most leather and better sports shoes will take up to 13 years from now to reach zero.

o Sharp growth in the US on a pairs basis was also recorded for Indonesia, Cambodia, India, Bangladesh, Nicaragua, and the Dominican Republic (DR) – all but Indo from small shipment levels.

 Note that the shipments from these countries are almost all in leather shoes, except for Indo and Cambodia, which specialize in sports/’ath-leisure’ types, some of which are leather of course.

o Shipments only fell from Brazil,which seems to have lost leather shoe sales to the previous group.

• US leather shoe imports fell in unit terms by 1.2% for the three quarters of 2015.

• China was down 7.8% in units and 3.2% in value,although China still accounted for 55% by value of all leather shoes imported into the US during the period, by far the largest of any supplier.

• In addition, recording declines were Thailand, and Italy.

• Large units increases were reported for Vietnam, India, DR, Cambodia, Bangladesh, Portugal and Nicaragua (up 67% and all from one exporter, the Brazilian Tech Shoes, the lone investor there in the shoe export business).

• The trend seems clear: China’s shipment of leather shoes to the US is declining significantly with most of the business shifted to the large group of niche players in the leather export space.

• Vietnam, Indo and Cambodia are soaking up sports and ‘ath-leisure’ items, while Bangladesh and DR take outdoor types while more tailored looks are going to Mexico (especially boots), India, Spain, Portugal and Nicaragua (especially for casual types).

US Imports of Leather Goods – China Continues to Dominate Shoes, Apparel, Gloves and Bags; Mexico Finished Leather

• In addition to dominating the leathershoe, import business as noted above, China is also the largest supplier of leather garments to the US accounting for some 42% by value of imports so far in 2015, although both its market share and the total imports of leather garments fell sharply.

• China is also the dominate source for US imports of leather bags and other accessories. In fact, in addition to footwear, China has a more than 50% market share in US imports of the following leather items: luggage/brief cases, travel and sports bags, women’s handbags and purses, other personal items, as well as belts, saddles, etc.

• As to finished leather imports, Mexico has a 66% share with Italy and Brazil distant followers at 9% and 7% respectively. Most of the finished leather is for the auto industry.

Peter T. Mangione, Global Footwear Partnerships LLC, Washington, DC, December 23, 2015, ptmangione@gmail.com, Copyright@Global Footwear Partnerships LLC. All rights reserved. No reproduction without written permission