Which Shoe Fits Your Portfolio the Best?

Arturo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The business models pursued by shoe retailers Finish Line (NASDAQ: FINL), Foot Locker (NYSE: FL), and DSW (NYSE: DSW) provide good samplings of how marketing and sales have radically evolved in the footwear market. An understanding of how these listed companies are addressing the shoe retail market’s evolution should immensely help on whether to invest or not in their equities.

Segmenting the footwear market

Essentially, the respective business plans of retailers in the mold of Finish Line, Foot Locker, and DSW revolve on footwear product segmentation, focusing on the market niches wherein they believe the opportunities are more lucrative. Finish Line, for instance, concentrates on footgear for running, with the company’s foundation rooted on the running boom during the 1970s and 1980s.

As of this March, it has 655 mall-based stores in the U.S., including Finish Line-branded outlets in five Macy's department stores. These shops are complemented by digital portals for online and mobile shopping.

Foot Locker is a much larger athletic shoe retailer with locations not only in the U.S., but also in Canada, Europe, New Zealand, and Australia. It has a total of 3,335 stores as of this February, and an additional 42 franchised outlets in South Korea and the Middle East.

Besides its Foot Locker brand, the company also uses other brand names as it defines the universe of its business. These brands include Lady Foot Locker, Kids Foot Locker, Footaction, East Bay, CCS, and Champs Sports. The company, which is known to emphasize basketball footgear, likewise operates digital direct-to-customers channels via the Internet and mobile devices for each of its brands.

DSW is a smaller shoe retailer with an operating model distinct from those of Finish Line and Foot Locker, both of which have a bias for athletic footwear and accessories. The concentration of DSW, on the other hand, is on style, offering select, fashionable branded footwear and accessories for men, ladies, and kids.

This company has 368 stores in the U.S., District of Columbia, and Puerto Rico. In addition, it has 348 leased locations for other retailers in the U.S. under the Affiliated Business Group. DSW, too, has an online marketing presence via an e-commerce site and a mobile site.

A struggling finisher

<table> <thead> <tr><th> </th><th> <p>4<sup>th</sup> Quarter Sales</p> </th><th> <p>% Change Comparable Store Sales</p> </th></tr> </thead> <tbody> <tr> <td> <p>Finish Line</p> </td> <td> <p>$442.7 million</p> </td> <td> <p>0.7%</p> </td> </tr> <tr> <td> <p>Foot Locker</p> </td> <td> <p>$1.7 billion</p> </td> <td> <p>7.9%</p> </td> </tr> <tr> <td> <p>DSW</p> </td> <td> <p>$594.3 million</p> </td> <td> <p>3.6%</p> </td> </tr> </tbody> </table>

Based on the most recent sales results of the three specialty shoe retailers as summarized above, it is obvious that Finish Line is struggling in the race. Were it not for a 25.1% gain in digital revenue, which were included in comparable sales, its top-line performance would've been hobbled even more.

As a remedy, Finish Line is pushing basketball footwear to counter the softness it has been experiencing in footgear for running. For the moment though, a pass might be prudent for this stock, with the company expecting no dramatic gain in sales/EPS as it is still fine-tuning its market segmentation approach that could keep it apace with its peers. 

Stocks worth locking on to

The fortune of DSW, too, for some anxious days, appeared dim as its fourth-quarter results' announcement on March 19 sent its shares tumbling to a $60.26 four-month low, with  the company’s $0.69 EPS falling short of the $0.72 consensus estimate.

The company also said that its fiscal 2013’s first six weeks were off to a weak start, with a 5% comparable sales decline for the period. The stock, however, has regained footing, apparently bolstered by some analysts’ pronouncements that the price drop is an opportune investment window. Indications of rising U.S. consumer spending also augur well for DSW shares.

With consumer confidence on the uptick, another purchase worth a serious look is Foot Locker, share prices of which have dropped to as low as $31.30 this March. Bearish sentiments of hedge funds on the company’s shares can possibly open a good entry point for this stock’s upside potential. This possibility has been seen by several stock analysts polled by NASDAQ, who believe Foot Locker merits a strong buy.

Arturo Cuevas has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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