US Economy Growing Slowly; Retail Under Performing; Full Year Outlook Better;

Athleisure Shoes Still Hot; Election looking more like a toss up

US Economy

• US GDP growth is sputtering: up only 1.1% in the second quarter following only 0.8% growth in the first quarter of 2016.

o Business investment is lagging sharply, retail is sluggish and uncertainty about the presidential election – and the future direction of tax, trade, security and social policy – seem to be the main drivers of the doldrums.

o Many economists believe that the rest of 2016 could witness a pickup in business, especially in corporate earnings, but the outlook for retail and the holiday season is subdued at best.

o Hiring has also slowed down, as some now believe that we are near ‘full’ employment, although some indicators point to many still out of work especially those with limited education and few modern job skills.

o Significantly, the US central bank, the Fed, is so worried about slow growth and the near absence of inflation that it has declined to raise interest rates by even one quarter of a point so far this year, although they may do so at their December meeting.

 What worries Fed watchers most is what it will be able to do if the US slides into a recession since there is no room to lower rates.

 It is a sad commentary -- that 1% GDP growth is all that is possible so far this year -- despite interest rates at zero for nearly 7 years and some $3.0 trillion dollars in Fed buying of securities to stimulate growth.

 Many point to the need to lower the US corporate income tax – at 35% it is the highest in the developed world – and the avalanche of new business rules from Obama on health care, investment, environment, etc., as inhibitors of growth.

No doubt, some of Trump’s appeal is his recognition of the need for urgent reform to unshackle business; while Clinton preaches doubling down on Obama’s unproductive approach.

US Politics and the Next President.

• Much to the surprise of many observers – including this one – Trump has done the seemingly impossible and is now very close to Clinton in the national polls -- 45% to 43%.

o Most importantly, he is close to her in the key battleground states – Florida, Ohio, Pennsylvania and North Carolina – that look more and more likely to decide the election, as they have in each of the last four presidential contests.

 Trump needs to win just about all of these states to become president -- a tough challenge given the large number of minority voters in all of these states.

o A month ago, Clinton was far ahead in nearly every such state and it looked like a landslide victory for her in the Electoral College; it is now much closer, although her natural advantage due to the overwhelming support in many states that are certain to vote Democratic, still gives her a strong edge to win.

o Much of the turnaround is due to more and more Republican voters deciding that Trump – despite his bluster, lack of tack and inexperience – is still better

than Clinton, who has negative ratings nearly as bad as Trump and promises more of the much discredited economic, security and social policies of Obama.

• Some 80% of the US electorate is white and Trump is doing well with nearly all of this demographic – less so with university educated ones.

 Clinton is far ahead with all minorities – but she is not as strong with any of them as Obama was and this is making the race tight.

 While Trump has but 5% of black voters, and Clinton has 75%, this is much less than the 94% of black voters that supported Obama; many blacks may not bother to vote this time.

o The recent rash of shootings and other violence -- some terror related and others police killing of blacks – seems to be helping Trump and his ‘law and order’ pitch.

o The first debate was a ‘win’ for Clinton, who came across as more knowledgeable, controlled and presidential.

 However, her formula of more taxes and more government spending, contrasted sharply with Trump’s strong case for more free enterprise, lower taxes, reduced regulation and more robust anti-terror and anti-crime measures.

 Both have glaring character flaws –

• Clinton seems to lie whenever she is called out on her emails, her foundation, etc. She may be qualified, but whether she is morally fit to be president is an open question.

• Trump, who refuses to make public his recent tax returns (a standard disclosure for those seeking elected office), perhaps not wanting to make public just how little tax he pays, finds it hard to conceal a life time of bigotry and often sharp dealing in his business career.

o He is both poorly qualified and morally unfit for the highest office of trust in the land, but his policies and decisive commitment to new directions make him a formidable candidate.

International Trade on the Hot Seat.

Both candidates are against the Trans-Pacific Partnership (TPP).

• Trump has linked trade deals like NAFTA and China’s 2001 accession to the World Trade Organization (WTO) to the loss of manufacturing jobs in the US.

o There is some recent research supporting this theory, but automation and large job growth in other sectors mostly mitigates his favored solution – clamp down on trade to ‘bring back’ manufacturing jobs.

o The reality is that US manufacturing is strong and would be even stronger if we only had a better-trained pool of workers needed for today’s high tech production plants.

 A huge number of production jobs are unfilled in the US because of lack of skilled candidates.

 Lack of technical education is really the issue, not too much international commerce or lopsided trade deals.

In sum, it is now a long shot that TPP can be passed by Congress in the post-election session – there is just too much rhetoric against it, but as of today, it looks as though Obama will try anyway.

If Clinton wins, TPP could be revised. Once it was made more responsive to her supporters, it could be passed in a year or two.

If Trump wins, TPP will be dead. Moreover, China could face currency manipulation extra duties on its exports to the US, as well as more cases against it for intellectual property violations in the WTO. Mexico could also face new trade restrictions, a possible re-do of NAFTA, a donnybrook over a border wall, etc.

Retail Sales Overall.

• The driving forces of the US consumer economy for the last several years and earlier this year have been strong sales in autos and housing (both driven by rock bottom interest rates and lose lending standards).

o The second quarter of 2016 witnessed a marked slowdown in both sectors: auto sales may have just reached a saturation point for the time being and housing slowed down due to lack of inventory both existing and new construction.

• General merchandise retailing continued to struggle in the second quarter of 2016, although the surge of internet business kept some of the more internet perceptive brick and mortar retailers from drastic declines in sales.

• There can be little doubt that the spate of killings across the country including at least one rampage at a shopping mall has discouraged shopping at physical stores; mall traffic continues to decline.

o While internet buying is taking up some of the slack, it may not be enough to offset the declines in physical shopping.

 So much mall buying seems to be impulse driven, while internet purchasing seems to be more like research – less emotional -- and returns are much more for on line purchases than for store buys.

Department Stores – Decline Deepens with No End in Sight

• The situation with Nordstrom, perhaps the best run better grade outfit in the US, demonstrates just how bad sales are for brick and mortar businesses.

o Overall, the company reported comparable sales down by -1.2% for the quarter (comparable sales or ‘comp sales’ only include sales in the current quarter from stores open in the same quarter a year ago and include internet sales).

 In its flagship full line mall stores, which represent half the company’s sales, comp store sales were down by -6.5% from the same quarter in 2015. Comp sales at its discount chain, Off the Rack, were up a mere 1.1% for the quarter.

 Its full price on line business was up by 9.4%, while their off price online sales were up by 34.7% (albeit from a small base).

 Bottom line is that only internet sales are keeping this American icon from slipping into oblivion.

Macy’s is the largest department store chain in the US with over 800 units all over the US. It just announced that it would close some 100 of these locations and retire its long time CEO.

 This hardly surprising given its terrible recent business – comp store sales down -2.0% for the quarter.

The smaller Dillard’s did even worse, down -5.0% on a comp store basis for the first quarter. Neither has the internet following of Nordstrom.

Kohl’s, a store in between the mass market companies like Wal-mart and the department stores fared poorly also, down -1.8% in comp store sales for the second quarter.

• Both of the leading mass-market firms did better, but only slightly.

o Wal-mart had comp store sales of plus 1.6% and Target had a minus of -1.2%; both rely heavily on food/groceries in their stores, so while not broken out, it seems clear that sales of general merchandise like shoes was probably well in the red for the quarter.

Really, the only bright spot in the department store space is TJ Maxx, the seller of off-price branded apparel, shoes and housewares. It had a sparkling 2015 up some 5% on a comp store basis.

 It also had a stellar second quarter in 2016, reporting comp sales up 4.0% following a 7.0% plus comp store performance in the first quarter of 2016.

 This group which operates some 2,500 stores including the Marshall’s chain (another 1,000 stores only sell housewares), might be characterized as the ‘non-department store’, department store -- all self-service, most presentation by type not brand and a house that shouts ‘bargains’ with its low prices compared to the regular department stores and their internet offerings.

[Leading US Department stores table]

Shoe Retail and Brands

• The second quarter of 2016 was lackluster for general shoe retailing, downright painful for brands in the fashion footwear and non-athleisure segments, and even the sports group showed signs of slowing performance after many quarters of sensational results.

• On the retail side:

o The best performers were Footlocker with a solid comp store sales increase of 4.7%, while its much smaller competitor, Finish Line, reported a similar 5.1% comp store sales increase for the quarter.

o Once again the fashion footwear giant, DSW, was down. This time -1.2% on a comp store sales basis, the third negative performance in the last 6 quarters.

o Famous Footwear, the self-service family shoe store operated by Calares, was also in the red, with a decrease of -1.1%.

o The funky oriented ath-leisure specialist, Genesco and it Journey’s brand, had a sharp decline of -3.5% comp store sales for the quarter.

• On the brand side:

o Under Armour (UA) reported a 28.0% sales increase for the quarter, increasing overall business (it is about three-quarter’s apparel) by some $217.0 million in the quarter to about $1.0 billion. It is on track now to clear total sales for 2016 of $5.0 billion.

 Footwear revenues increased 58% to $243 million in the quarter.

o Nike reported sales up 8% for the quarter or an increase of some $647.0 million over the same quarter in 2015.

 Some analysts believe that Nike is slowing down somewhat owing to competition from UA, Skechers, which was up by 9.7%.

 Adidas reported a strong 13.0% increase for the quarter and now seems on track to break out of its many years slump with new designs and technologies.

 The recent closing of all the stores of leading athletic retailers, Sports Authority and Eastern Mountain Stores (both hit by the internet wave and their emphasis on performance and less on athleisure looks) surely hurt Nike’s sales for the quarter.

 The fact is that Nike’s 60% market share in sports footwear is unsustainable, no matter how well they execute.

• Consumers like new brands and new excitement like the boost UA got from its key basketball endorser, Steph Curry, whose name sake shoe was the best selling sports shoe in the last 12 months.

o The brands not in the sports or athleisure space fared poorly once again.

 For women’s especially, athleisure is dominating sales at the expense of fashion footwear. Why? Because US women are wearing yoga pants, tees and sports shoes for everyday casual today, even on dates, etc. Go to any US shopping mall and see the windows filled with yoga outfits and the see the customers walking around in them! Or check the ads in the Wall Street Journal for Gucci, DKNY, etc. – all are showing athleisure styles to their corporate customers!

• Calares (the new name of Brown Shoe) reported a decline of -3.8% for the quarter in its wholesale business led by its Naturalizer brand known for its comfort and fashion.

• Steve Madden, the leader in mainstream women’s and girl’s fashion footwear, only reported an increase of 0.6% for the quarter. As the leader in this space, it is highly telling how badly the space overall is doing.

• Wolverine World Wide and its stable of outdoor brands were also hurting, reporting sales down -7.4% for the quarter.

[US Footwear Retail/Brands table]

Peter T. Mangione, Global Footwear Partnerships LLC, Washington, DC, September 27, 2016, ptmangione@gmail.com, Copyright@Global Footwear Partnerships LLC. All rights reserved. No reproduction without written permission