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Don't Bet Against Bieber, Buy into What he Wears

2/14/2011
By Brian Sozzi, Research Analyst

If 2010 was the year of the replenishment cycle in retail land, characterized by consumers returning to the malls and outlets after their 2009 belt tightening campaign, than 2011 may be the year of the impulse buying cycle.  With the jobs market on the mend and paychecks a touch fatter (broadly speaking) thanks to stimulus, consumers are prepared to splurge once in a while.  Those splurges will be at times of necessity (see sales of pricey rain boots last fall and then winter boots during the holidays), when the price is right for a product being stalked, or flat out consumption of full-priced merchandise that distinguishes itself in the closet.  The most interesting products I am seeing in the malls is within footwear, and it's not solely relegated to women's shoes.  Men's and children's shoes certainly have some trend existent.

Am I Clinton Kelly, not exactly.  I do concoct mean ensembles for work and going out, but alas am lacking Clinton's fashion credentials.  However, I know what I am seeing in the malls and online, and it all boils down to embellishment.  That embellishment comes at a premium price for the consumer, which is music to the ears of retailers and manufacturers grappling with higher costs of production.  In order to adapt and overcome in the new era of apparel inflation, one best be selling less of the same and more of the sizzle to the consumer.

Women's Shoes
I am leaving myself open to ridicule from colleagues, but there are just an array of fun shoe styles in the stores for women this spring.  It arrives at a great time for retailers as the unemployment rate for women is improving (sales of suits at Ann Taylor have been strong for over a year), meaning a new pair of shoes for work and perhaps something extra for meetings outside of the office.  Additionally, it means a few extra bucks available for non-work shoes, say within the performance category, to sit in on a zumba or hot yoga class.  Trends this spring include:

* Kitten heels (yes, they are back)
* Continued acceptance of new Ugg styles during non-winter months
* Sandals having soles made of wood or cork
* Embellishment in the form of flowers or hardware (buckles, etc.)
* Booties

Men's Shoes
It has long been a commonly held belief that men don't favor shopping, preferring a trip to the dentist instead.  Data would suggest otherwise; men are taking a bit more stock in their appearance.  For winter, there was significant trend behind the boot category, unsurprising as boots were paired with skinny denim and khakis on about all masculine mannequins in department stores and specialty stores.  In addition to boots having their season elongated, I see "workplace appropriate" sneakers being quite prominent.  Now, if I am an I-banker at Goldman Sachs (GS) would I be inclined to rock a pair of shiny black high tops over a pair Gucci loafers?  Checkmark on the Gucci loafers.  In many workplaces though I think men could fly under the radar wearing  a pair of $350 Gucci high tops found at Nordstrom (JWN).

The Little Ones
When I was but a wee lad I bothered dear old mom for the latest pair of Jordan sneakers from Nike (NKE).  I never got them, but it was worth a shot.  Today, the current crop of teens have Justin Bieber as their go to fashion source on shoes.  The Beebs is known for his trendy high top sneakers (see picture above), as well as that mop of hair.  Sales of children's footwear lagged both men's and women's in 2010, but I think with economic improvement comes a lift in children's footwear sales.  After all, those feet are growing fast for teens.  Footwear retailers are showing all sorts of high tops this season, donning notable color and uniqueness that makes the merchandise appear of greater quality (and this is important). Nike is leading the charge, and looks set to cash in on "Bieber Effect."

How to Play the Investment Thesis

Numerous names are prevalent to position your portfolio accordingly.  In my view, the following are the basic criteria for the investment:

1. Must have buying leverage on suppliers
2. Must be gaining shelf space at retailers
3. Must not be competing on price

I generally prefer the footwear manufacturers over the retailers as they offer more potential for earnings surprises due to (1) price increases; (2) sales to emerging markets; and (3) expectations have begun to be lowered.  Nordstrom from the stable of retailers is a name we continue to view favorably.  From the manufacturer perspective, it's Nike and Polo Ralph Lauren (RL).  Both of these companies have scale, both companies have pricing power, and both are releasing interesting products.  Nike would be the Bieber trade, while Polo a play on increased points of distribution for its upper end women's shoes and category expansion in men's.

Brian Sozzi
Wall Street Strategies

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