A recession, and the job woes that goes with it, have made for wary customers who aren’t quite as willing to splurge on more than they need. It’s a trend that’s rippled through the retail space, extending all the way to the feet of would-be shoppers eyeing the latest Nike shoes at Foot Locker.
Consumer behaviour has changed during the recession, said Tim Henderson, senior director and consumer strategist at Iconoculture Inc., a Minneapolis-based consumer research firm.
He thinks consumers will not return to what he calls “the gluttony shopping that we saw prior to 2007.”
“Gluttony shopping,” he said, “is gone for good, I think.”
That new truth has weighed on Nike Inc., (NKE-N64.42-0.54-0.83%) the world’s largest sportswear company, and Foot Locker, (FL-N11.100.161.46%) its biggest retail chain partner, in the notoriously competitive sportswear sector. However, this pair have managed to hold their own so far, analysts say, and they could see their share prices rise as a result.
It’s been a tough few years for every retailer, especially in the United States, where consumer spending has declined for the second straight year south of the border.
And despite a 1.8-per-cent rise in retail sales for October – the second increase in as many months, according to the Thomson Reuters index of 30 retailers – experts aren’t expecting a major turnaround in consumer confidence for a while.
That contains Christmas. The National Retail Federation, in a survey of U.S. families released in late October, found that consumers plan to spend an average of $682.74 (U.S.) on holiday-related shopping, a drop of 3.2 per cent over last Christmas.
“Everyone’s pretty well expecting that the consumers aren’t going to spend that much,” Mr. Henderson said. “This won’t make retailers happy but consumers are sticking to their guns.”
In the case of footwear, according to an industry review released last week by Standard & Poor’s retail analyst Jason Asaeda, sales in the U.S. dropped 4.1 per cent to $42.9-billion (U.S.) in 2008.
For athletic footwear, the drop has been a little less dire – 2 per cent, from $19-billion to $18.6-billion in 2008, according to statistics by NPD Group, a market-research company.
Mr. Asaeda believes that while the declining sales trends appear to be continuing this year, it doesn’t mean doom and gloom for athletic footwear stores. Cost-cutting and low inventories have helped the chains maintain profit margins, he writes.
It’s a view shared by a number of analysts, who believe that the race for profits in the sportswear sector is more of a marathon than a sprint. To ensure profits going forward, companies need to effectively manage their costs and inventory.
“We’re at what you would call a new normal,” says Mr. Asaeda’s colleague Marie Driscoll, a Standard & Poor’s retail equity analyst who covers the fashion and sports apparel markets.
Ms. Driscoll said that since the recession began in the U.S., retailers have had to take drastic measures to counteract the deep drop in consumer demand. “They were over-stocked,” she said. “But with so many store closures and inventories brought in line to the new, lower level of demand, the broader retail picture is beginning to change.”
The inventory streamlining had a huge effect on Nike Inc., she said, because the company “is a wholesaler to a large extent. Retail outlets are buying less and that’s hurt [Nike]. It’s not their brand positioning or that they’re too high-priced. They are priced competitively.”
Nike, too, has cut jobs and streamlined inventories to help boost profits. When it announced its first-quarter results on Sept. 28, the world’s largest sportswear company said its revenue dropped 12 per cent for the quarter to $4.8-billion (U.S.) and its worldwide future orders – a measure of what retailers are planning to have delivered – fell 6 per cent. But the sports apparel and shoe maker was able to keep a tight rein on its costs and boosted its earnings to $513-million from $510.5-million the year before.
Against that backdrop, S&P has a “buy” rating on Nike and thinks the company should be rewarded in the market for its ability to weather the retail storm. Ms. Driscoll said that sports-apparel companies “have held up better than apparel in general, but the stocks haven’t. Maybe it’s time for the stocks to react.”
Not all analysts are ready to say the sport apparel maker’s stock is ready to rise. A recent report by UBS Securities analyst Michael Binetti takes a more cautious view of Nike, with UBS raising its one-year price target to $66 and maintaining a neutral rating.
The UBS report, which looks at Nike and the retail chain Foot Locker (a major seller of Nike products), acknowledges the “sluggish footwear trends” in U.S. athletics and sporting goods, but says the price-target increase stems from Nike’s first-quarter results, along with its growing presence in emerging markets and improving foreign-exchange trends.
Slow sales trends are hitting Foot Locker harder, in the view of analysts. In the case of New York-based Foot Locker, UBS is maintaining its $10 price target and a neutral rating.
UBS cut its estimates for Foot Locker’s third-quarter earnings per share from 16 cents to 14 cents because of how the “sluggish” trends will impact the retailer: a drop in athletic and sporting goods in general, slower sales for basketball footwear, which make up an estimated 50 per cent of the chain’s sales, and the drop in sales for Nike, which accounted for 65 per cent of Foot Locker’s sales in 2008.
While UBS is cautious about Foot Locker in the near-term, it does cite promising catalysts that could lead the company to revisit its neutral stance. The chain, says UBS, has cut its inventory, closed its least productive units and cut costs in stores. It also has a new chief executive officer, Ken Hicks, who has an “impressive retail résumé.”
Foot Locker has a 6-per-cent dividend yield, one of the highest in the sector, which UBS points out “offers downside support for the stock.”
The hurdle immediately ahead Foot Locker and Nike will be keeping sales up in the key Christmas retail season.
“I think all the surveys that we’re seeing indicate that consumers are still concerned about the economy, and in particular what’s weighing on their minds is the job picture,” said Iconoculture’s Mr. Henderson.
“And what that means to retailers going forward is consumers will continue to be in a savings mindset, not a spending mindset.”
For its part, UBS is cautious on the outlook for Christmas, saying consumers are taking a “wait until the last minute” approach to shopping.
