Eventually all of the brands I wear become parody commercials on Saturday Night Live. “New Balance—shoes—made for running,” went one a decade ago, “but worn by chubby white guys in their late 30s to early 40s.”
It turns out that’s way off. I’m pushing 51 now and still wearing them. Different pair, I’d like to make clear.
I’m ready to try something new. My last couple of NBs have had stretchy fabric on the top part and giant, pillowy foam on the bottom, which is comfy, but a lot like the style of Hoka, a rising brand with French roots. How do I know about something rising and French, you ask? The last three people I saw wearing Hokas were neighbors over Social Security age—full benefits, not early. Old people apparently love Hokas. It’s difficult to interpret what that means for brand heat.
Wall Street can help. I first learned about Hoka while reading quarterly reports from
Deckers Outdoor
(ticker: DECK), which makes those fleecy Ugg boots. A decade ago, it bought a start-up sneaker maker popular with marathoners, called Hoka One One. It’s pronounced onay onay—keep that fact handy to impress absolutely no one.
Last quarter, Deckers revenue increased a healthy 10% year over year to $676 million, but Hoka jumped 27% while Ugg slipped 6%. Judging by Factset consensus revenue estimates by product line, Hoka will soon overtake Ugg as the top Deckers brand.
That gets me thinking: Why am I wearing sneakers from a privately held company? I should shop for something publicly traded. That way I can use familiar tools like stock screening software and analyst reports to make up for my innate deficits in fashion sense.
Hoka makes a strong showing. Deckers shares are up 358% over five years—just the kind of price action I’m looking to wear. At 23 times earnings, they might give value investors pause, but overall revenue is seen rising by double-digit percentages in coming years.
But hang on. Have you heard about the Swiss brand On? That one is pronounced just like it looks. It has giant foam soles, too, but with holes going across, so they look like bouncy tank treads. This past week, the company,
On Holding
(ONON), reported a 52% jump in revenue, to 444.3 million Swiss francs (about $504 million), and management raised its guidance. The stock actually fell 14% because investors were looking for more.
UBS, which should know a thing or two about Swiss fashion, said investors should use the selloff to buy, calling On “softlines’ best grower.” Softlines is a retail term for things that are mostly soft, like clothing and bedding, whereas hardlines are hard, like hammers and toasters. But some softlines are hard, like steel-tip boots, and some hardlines are soft, like loveseats—got it? Me neither. But the point here is foam tank shoe growth, and On is expected to double its revenue within about three years.
The company is about the same age as Hoka One One, and both seem to be following the playbook that worked so well for Nike (NKE) and New Balance: engineer highly technical shoes for elite athletes, then wait for doughy folks to buy them, too. Earnings for On turned positive last year and are ramping up quickly from a small base. At 4.8 times this year’s projected revenue, the stock is about 30% more expensive than Deckers.
I’m not necessarily opposed to wearing a turnaround, but I’ll need plenty of convincing on
Adidas
(ADDYY). The stock has disappointed for more than a decade. Executives and new plans have come and gone: “Route 2015,” then “Creating the New,” then “Own the Game.” The new plan should be called Yeezy Sneezy, Old Shoes Pleasy. The idea seems to be to expel from inventory the last of the Yeezy models associated with canned rapper Kanye West, and to replace them with athletic performance designs from generations ago, recast as lounge-abouts.
There’s Samba, originally a 1949 soccer shoe; Gazelle and Spezial, court shoes from the 1960s and ’70s; and Campus, a basketball shoe from the 1980s. Collectively, the franchise is called Terrace. It might not be a great fit for pro athlete endorsements, but there are tie-ins, like the adidas x Gucci Gazelle shoes, whose pattern evokes foot pocketbooks, and the adidas x Bad Bunny Campus, which come in chalky brown. Bad Bunny is a rapper, not an ice cream—you’re thinking of Blue Bunny, which isn’t bad.
The plan seems to be working. Inventory is still too high but getting there, says BofA Securities. Margins are moving in the right direction. Fashion magazines have given Terrace shoes favorable coverage, and
Foot Locker
(FL) recently told investors that Samba and Gazelle are selling well.
“Is Terrace a silver bullet for Adidas brand heat issues?” asked BofA in a note to investors this past week. “Probably not; however, the franchises are a meaningful step in helping it improve.” It upgraded the shares to Buy from Neutral, predicting that earnings will bounce back smartly from what is expected to be a loss this year.
That’s as far as I’ve gotten. I’ll hold off on Nike. Historically it has come out ahead, but shares have underperformed over the past one, three, and five years, and they aren’t an obvious bargain at 28 times this year’s projected earnings, which are expected to dip from last year. I don’t need that kind of negative momentum on my feet right now.
Crocs
(CROX) is doing remarkably well for a company that sells rubber clogs, which many expected to be a passing fad. Now it does flip-flops, sneakers, slippers, flats, boots, and professional shoes for nurses, chefs, and more. The stock has done well in recent years, but it fell by double-digit percentages following its past two earnings reports. Step carefully.
Come to think of it, I might need to pick up another pair of New Balances to see me through the research process. The next thing to watch for is an On Holding analyst day on Oct. 4. That could restart the stock, UBS says. More gains could be afoot.
Write to Jack Hough at [email protected]. Follow him on Twitter and subscribe to his Barron’s Streetwise podcast.
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