Retail Footwear

Footwear

Industry Insights

Approximate net recovery on cost

Synopsis

Current trends

  • The Consumer Price Index for Footwear was -2.1% (unadjusted) for November 2017 over 2016, with Women’s footwear driving the negative trend at -4.2%. Men’s footwear was slightly positive at 0.3%, and Youth footwear came in at -1.3% for the same period
  • U.S. retail sales for clothing and accessories stores increased 1.1% in the first eleven months of 2017

 

Projected Values

 

Revenue Growth

 

Online channel continues to rise: While many shoppers still prefer to try the fit and comfort of shoes in a store, an increasing number of consumers are buying footwear online. Enticed by diverse product selections, low prices, convenience, and oftentimes free shipping, it is no surprise that online sales continue to grow. As the millennial generation (and younger) increasingly turn to their phones to shop, companies that have not yet developed and enhanced their omni-channel platforms are way behind the competition. Corresponding to customer preference, industry revenue for online shoe retailers increased 15.2 percent from 2011 through 2016 and is projected to trend up 9.2 percent through 2021.
 

Industry analysts note that the largest challenge for shoe retailers is getting customers to buy and return items in brick and mortar stores. Online shopping has become a particular problem for shoe retailers, which often struggle with high return rates. It has become commonplace for customers to order eight pairs of shoes in different styles and sizes and keep just one. Fulfilling large orders, then processing returns, and covering return shipping costs can add up to an expensive problem. According to Steven L. Marotta, a footwear analyst for CL King & Associates, “Today’s retailer needs to be able to do it all.” Marotta adds, “Ship to store, ship from store, ship store to store. Anybody who can’t offer that is at a disadvantage.”
 

As the internet continues to comprise a larger percentage of many companies’ sales, it is important for lenders to engage appraisers with experience valuing an e-commerce platform. It is critical to watch performance of these channels closely. While they may comprise only a fraction of sales, declines in performance could indicate that the product mix is off, customers are experiencing a suboptimal shopping experience, or there has been a decline in brand reputation, which could be early indicators of distress.
 

Manufacturing move: Footwear from China, the largest supplier of shoes to the U.S., is losing market share as manufacturing continues its shift to Vietnam, according to recent accounts from Footwear News and Sourcing Journal Online. Vietnam’s footwear industry has recently benefited from technology upgrades. In addition, English-speaking management, a focus on compliance, and factories moving from cities to rural areas, where wages are lower, have also contributed to Vietnam’s growing share of footwear manufacturing. China accounted for 58 percent of U.S. footwear imports in 2016, representing a decrease from 62 percent in 2015. Conversely, imports from Vietnam represented 16 percent of U.S. imports in 2015, increasing to 19 percent in 2016. With the Trump administration pulling the United States out of the TPP trade agreement (now the CPTPP), it remains to be seen if this rate of growth will continue. Nevertheless, Vietmax.com notes that Vietnamese earnings from leather and footwear exports in 2017 were up 10 percent over 2016 to $17 billion. The U.S. was the biggest importer, accounting for 34 percent of the total revenue. The decline in Chinese manufacturing is also partially linked to the country’s phase-out of low-end manufacturing as it emphasizes the service sector and high-tech products. Watch for more footwear brands to potentially move from China to Vietnam for sourcing as investment in Vietnamese manufacturing continues to grow. Watch for potential changes in pricing as cost of goods components may fluctuate with changes in manufacturing. Changes in cost of goods and gross margin rates directly affect liquidation values, so it is always important to monitor these metrics, especially changes in pricing and discounting to the end customer.
 

Amazon dominates: Amazon currently owns 29.1 percent of the online footwear market. Amazon’s shoe revenue increased 35 percent (excluding accessories) over the prior year for 2016, and increased 18 percent in the first two quarters of 2017, per data supplied by One Click Retail. Amazon’s best-selling category for the first two quarters of 2017 was athletic shoes, which generated $205 million in sales representing 45 percent growth over the prior year. The “comfort” and “junior’s” categories came in second ($135 million) and third ($120 million) in sales showing huge growth at 210 percent and 235 percent, respectively, for the same period.
 

Building on its momentum, in mid-2017 it was announced that the internet retail giant was launching a deal with Nike to open a dedicated online brand shop. While Nike products have long been available on Amazon through unauthorized third-party sellers, this program will be the first time that Nike has sold directly on Amazon. In this trial partnership, Amazon will test a pilot that will allow Nike to sell a limited selection of footwear, apparel, and accessories on the site. The move is designed to curb knockoffs that are often sold on through third-party vendors, which has been an issue for Amazon in the past. The plan is good news for Nike, which has had a rough year. A planned layoff of over 1,000 workers was announced in June 2017, followed by net income figures down 18 percent for the six months ended November 30. Additionally, Nike continues to lose market share in its core North American market to its main competitor Adidas, which is expected to continue into 2018. Immediate market reaction to news of the Nike/Amazon pilot was that it may negatively impact vendor relationships and corresponding sales for other sporting goods retailers, such as Dick’s Sporting Goods, as well as the country’s 900 independent specialty running stores.
 

With major category retailers such as Payless ShoeSource filing for bankruptcy and closing hundreds of stores, Foot Locker’s third-quarter 2017 comparable store sales dropping 3.7 percent (following a 4.7 percent increase last year) plus its 45 net store closures, it appears that Amazon will maintain its number one share position for the foreseeable future.
 

Thinking outside the shoebox: To enhance the shopping experience, retailers across the country are adding services in an attempt to keep customers coming back to their physical locations, where people are more likely to make impulse purchases and spend more than they would online.
 

In October 2017, discount shoe retailer DSW announced that it was considering adding a rental service and shoe repair and storage facilities to some of its 511 brick and mortar stores. “This is something we’ve had a lot of customers ask us for, particularly with special-occasion shoes,” said Christina Cheng, a spokeswoman for DSW. Adding, “when it comes to prom or a wedding or a special event, people are usually looking for a very specific shoe in a particular color that matches a particular dress that they probably won’t ever wear again.” The proposal poses a number of logistical obstacles that DSW will explore solutions to over the coming months. Industry experts have raised concerns about the viability of such a service. “It’s good to think outside the shoebox, but this is taking the shared economy to a new extreme,” said the chief executive of the Luxury Institute, noting “I don’t think shoe-sharing is going to be either in high demand or highly profitable.” However, there are precedents for such an undertaking as consumers can currently rent clothing, watches, purses, jewelry, and more from various outlets.
 

In addition to DSW’s announcement, as of July 2017 three Chicago-area Macy’s department stores have shifted to a self-service shoe concept in which customers largely bypass sales associates by helping themselves to the sizes and styles they wish to try on. Stores that were part of the test saw shoe sales increase at a rate “well above” that at regular stores, as noted by Chief Financial Officer Karen Hoguet. The self-service format stores do maintain some sales associates, who are given hand-held devices they use to request pairs a customer wants to try, and stock associates who fill their orders. The goal of the change is to let sales associates spend more time on the floor with customers and less time in backrooms retrieving product. Locations making the switch so far tend to be smaller locations with fewer employees. To make room for the additional sizes represented on the sales floor, Macy’s will curate its in-store selection to focus on top sellers.
 

Stock levels drive business: In order to maintain sales volume, retailers must maintain considerable inventory levels and stockroom space. For every pair of shoes on display in a retail store, there may be a dozen or more in stock. The range of sizes, widths, colors, and fabrications by SKU needed to drive successful footwear sales can be a challenge to maintain as part of normal course business and can present sell-through issues in a liquidation. A typical size run may include 12 pairs of shoes for a single SKU, ranging from size 6 to 10 for women and 8 to 12 for men with duplicates of the most popular middle sizes. Add less popular sizes on the high and low end, as well as narrow and wide widths, and a retailer may have 15 to 20 pairs (or more) in backstock for every SKU on the sales floor. Without this level of stock, retailers may suffer lost sales. In a liquidation, it is important to understand stock levels for footwear, especially as it relates to size ranges since availability of popular sizes is a primary driver of value. Broken size runs (runs missing the most popular sizes) lower gross recoveries.
 

Similarly, inventory mismanagement and shrink at the store level can contribute to instances of mis-mated pairs (different sizes within a pair) and single shoes (missing mates). Significant numbers of mis-mates and single shoes translate to lower gross recoveries on those units. For lenders with footwear retailers in their portfolios, partnering with an appraiser to analyze a company’s in-stock position by SKU and understanding how to track sizing availability as part of routine collateral monitoring can be an important factor when faced with a liquidation.