Second Quarter Margin Projections: What This Means for Shoe Firms

Are Q2 gross margin expectations too high for some shoe firms? Maybe.

Softline companies are manageing their inventory well, said UBS analyst Jay Sole. After analyzing industry inventory levels at the completion of the Q1 earnings season, the UBS analyst concluded that inventory growth is “roughly in line with sales growth.” The good news there is that when inventory levels are in-line with demand, the result is limited risk of incremental markdown activity. That translates to inventory levels up 5 percent and Q2 sales expected to grow 4.9 precent.

And he thinks that Wall Street’s Q2 gross margin estimates largely reflect this dynamic. Overall, analysts are projecting a 70 basis point year-over-year gross margin expansion for the softlines sector. But consumer demand is the big variable impacting companies’ gross margin, Sole noted. And while U.S. spending intentions appear solid, the geopolitical landscape remains uncertain.

That said, he sees some firms doing better than others. He expects Ugg and Hoka parent Deckers Outdoor Corp. and Boot Barn to be in a better position than some of their peers. That’s because they have a favorable sales/adjusted inventory spread, and also — more importantly — a relatively low analyst gross margin percent outlook for the second quarter. The low expectations provides some upside risk in that Deckers and Boot are not likely to miss Wall Street’s consensus gross margin expectations.

The extreme are firms that have relatively worse inventory situations, along with analysts’ gross margin expectations are that already relatively high. This sets the stage for a likely miss on the consensus for gross margin expectations. The firm at most risk is Steven Madden Ltd., mostly due to elevated inventory levels from the first quarter resulting from the Kurt Geiger acquisition. The London-based Geiger could see lower sales due to a pullback on spending by consumers in the U.K. Madden acquired Kurt Geiger last year for $360 million. In addition, retailers that sell shoes in this sector include Dillard’s Inc. and Macy’s Inc.

Companies that have relatively better inventory levels and analysts’ second quarter gross margins that are relatively high include On Holding, Jimmy Choo parent Capri Holdings Ltd., Vans and Timberland parent VF Corp., DSW parent Designer Brands Inc. and Under Armour.

Sole said Crocs and Birkenstock have the worst inventory position, but they’re not at high risk like Madden because Wall Street’s second quarter gross margin expectations are already relatively low. Lululemon, which also includes footwear in its assortment mix, is also in risk profile.