Sneaker Fashion Tips from Wall Street

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So we're just going to say some things about feet. Is that the plan?

Finally, we're dedicating an episode to feet.

Listening in, our audio producer Meta. Hi, Meta.

Hi, Jack.

No guest, no CEO, no strategist or analyst. Just a few things that caught my eye on the subject of footwear this past week. One was an upgrade from B of A Securities on Adidas, and another was what, what I thought looked like blowout results from a company called On Holding, and the stock tanked. If you don't know On, You will in a moment. Can I tell you a quick personal sneaker story, Meta?

Always.

My daughter plays basketball for a team that is sponsored by a sneaker company. And the other day they gave her a pair of sneakers, which was amazing. I never get things right. People never give us things. So it was great to get a pair of sneakers. And then later that same day, we were watching youth basketball in a park. And there was, it was organized by a local professional basketball team. And there was the hype team there. In other words, people who like hand out t-shirts and different trinkets. And there was an MC and between games, he came over to the stands and he was saying, who's, you know, who wants to play one-on-one here? And he, and he picked a boy and then he picked my son. And I thought, oh no, I mean, you know, he's, he's coming along. He's a good player, but he's, he's a young boy. He's still a little floppy. I wasn't sure how it was going to go. Well, He went out there and he won 4-0 in a game of full court one-on-one. And the prize was a pair of sneakers, a pair of sneakers. It was a 2 free pair day for my family. I think it was the best day of my life. I think that's fair to say. And I know you're thinking like, you know, what about the birth of your children? Those were good days too. So fresh off that historic win, I've got sneakers on my mind., and there's a flurry of news to talk about. Are you a footwear brand loyalist, Meta?

What do you wear? I am an Adidas loyalist. Really? Yeah. Just because I found this one pair of shoes that fit really well and I can just keep buying the same kind again and again.

Good. Well, we're gonna get to Adidas in a moment. I'm a New Balance man. Don't worry about this being an endorsement. Companies should fine me for saying publicly that I wear their, their I wear their brands. Uh, every brand that I wear eventually becomes a parody commercial on Saturday Night Live. New Balance, shoes made for running but worn by chubby white guys in their late 30s to early 40s. Yeah, totally unfair characterization, by the way. Late 30s to early 40s. It is true that I was 40 when that episode first aired, but I'm pushing 51 now and I'm still wearing New Balance. Not the same pair, by the way. But I'm thinking about trying something different. I had my eye on a brand called Hoka. And Meta, you and I talked about this off the podcast and you said what?

That I thought Hoka was kind of for younger people.

Like me, right? Is what you meant?

Yeah. A little bit younger.

The last 3 people I saw wearing Hokas were Social Security age people. I think Hokas are very popular with the unyoung, and I don't know what that means for brand heat, but they're becoming very popular. I first read about Hoka, by the way, in the quarterly reports for a company called Deckers Outdoor. You've heard of UGG boots, you know, the fleecy boots, you know, UGG, right? Sure. That was a huge growth brand for years. Lately, it's been in decline. Sales last quarter for UGG were down 6% year over year. But a decade ago, that company, Deckers, bought HOKA. HOKA is a French brand that moved to California just before Deckers bought it. It seems to be following a standard playbook that was kind of made famous by not just New Balance, but Nike before it. I think what you do is you make a highly technical running shoe. And you market it to like ultra marathoners and elite athletes and so forth, and you get some buzz going, and then you just wait like a decade and then doughy people start buying it and then it becomes a big seller. It's sort of how the sneaker business works. And I think HOKA is well into that mass adoption phase. Revenues for that brand increased 27% last quarter for Deckers. If you look at consensus estimates on FactSet broken down by product line, Hoka is just about in the process now of overtaking UGG as the top Deckers brand.

Would you say Hoka got people hooked?

I wouldn't say that, but only because you already nailed it. But this is kind of my point here, Meadow. Why am I relying on my innate fashion sense to tell me which shoes to buy when I don't have innate fashion sense? What I should be relying on are the tools that are familiar to me, like stock screening software and analyst reports. I can use those to identify brand momentum, and that's going to keep me in fashion. That's the theory anyhow. The problem is I've been wearing a shoe from a company that's privately held, so you don't get all that Wall Street data. I gotta shop for something publicly traded, and that's what I'm looking for now. The trend— I could tell you my last two pairs of New Balance, they've been kind of I'm going to use some technical terms now. They've been fabric-y and stretchy on the top part that goes over your foot, and they've been bouncy and super foamy on the bottom part that goes under your foot. The sole, I believe we call that in the business. And that looks exactly like Hoka shoes. That's the new thing. The under— what do you— is the whole thing the sole? The undershoe, the underfoot part. It looks like— they look like giant foam beds on all these shoes. They're so bouncy. That's what you see is everyone walking around in these really bouncy shoes. And that's another thing. If New Balance is starting to look like HOKA, maybe I should just check out HOKA. And, you know, going by Wall Street fundamentals, HOKA makes a strong case. Decker shares are up 358% over the past 5 years. That is the kind of momentum I want on my feet. The stock is, well, I mean, value investors might be put off. It's 23 times earnings., but the revenues for the company are seen rising by double-digit percentages in the coming years. What happens is, as HOKA overtakes UGG, that HOKA growthiness becomes more heavily weighted in the results than that UGG sleepiness. But there is a HOKA doppelganger in town. In German, that's just one word, HOKA doppelganger. That's when you have two very similar sneaker companies. This one is a Swiss brand and it's called Aan, just O-N, and it's pronounced Aan. It's a little tricky because the company that owns Hoka, the name looks like Hoka One One, but the ones are pronounced oh-nay, so it's really Hoka One One. That's a little fun fact that you can use at cocktail parties to please absolutely no one. But Aan is spelled Aan and pronounced Aan, and it's Swiss., and it too has giant foam soles. Those soles have, how shall I describe, there are like tunnels going from one side to the other through the foam. So they look like giant marshmallowy tank treads when you're walking around. And that's, that's about as cushiony as it gets, I suppose. And On Holding reported quarterly results this past week and revenues there jumped 52%, almost twice as fast as the growth for HOKA.

Maybe they should change the name from HOKA One One to Oh No No.

You got a lot of HOKA material. On also raised its guidance for future revenue, but the stock fell 14% on the day because investors apparently were looking for even more. So is that maybe a buying opportunity on a hot sneaker company That's what UBS says, and that's a Swiss bank, so they ought to know about Swiss fashion. They called An soft lines best grower. Soft lines is a retail term for things that are literally soft, like clothing and bedding. Hard lines are things that are hard, like hammers and toasters. It's confusing because there are some soft lines that are hard, like steel tip boots, and there are some hard lines that are soft, like loveseats. There's a lot more growth to come apparently in bouncy, foamy, tank-looking shoes. On is expected to double its revenues within about 3 years. It's a little more expensive than Deckers. You can't really go by the earnings. They turned positive last year. They're still ramping up quickly from a small base, but On goes for 4.8 times this year's projected revenue. That makes it about 30% more expensive than Deckers. Now either of those will do nicely if I'm looking for more of a growth look on my feet. Nah, that doesn't sound right. Growth. Sounds like a budget. What if I wanted more of a value look? Something in a turnaround. Enter Adidas Group. Bank of America upgraded Adidas this past week to buy in a note titled, There's Something Here. They see upside for the shares of more than 30%. I am intrigued, but it's gonna take a lot of convincing. Adidas has had a lot of kind of false starts and turnaround efforts for investors over the years. In 2010, there was a new strategic plan called Route 2015, but then in 2000, around about 2014, there was another downturn for the stock. The company got a new person in charge of brands and a new plan the following year. That one was called Creating the New. And then it got a new CEO and the stock did well for a while. During the pandemic downturn, there was a new plan. It was called Own the Game. I don't know what game it's owning, but it's not the make money for stock investors game because the stock has stunk in recent years. Now, not all of this is entirely Adidas's fault. The company had a deal with Kanye West for sneakers. He said and did a lot of horrible things that got him ousted from the company, but his brand is called Yeezy, and the company was left with a lot of these Yeezy shoes. You gotta mark down shoes a lot to sell them when something like that happens, and that's bad for margins. But I actually have some experience in something a little similar. This is going to be— let me see if I can delicately tell this story. It's not about Yeezys. I don't have any Yeezys, but my wife came home with two pairs of sneakers that she bought deeply discounted, like half price for the kids. And she was bragging about what a good deal she got. And she showed me the shoes and they were signed by a professional basketball player who had recently been fired by Nike for some bigoted remarks about a, about a particular group. And this was a dilemma because there were no returns on the shoes. So do I throw the shoes in the garbage, which is wasteful? Bad for the environment too. Or do I have the kids wear the shoes and run the risk that someone's going to see that, know about the incident with the player who had signed them, and think that I am somehow saying that that's okay? That's definitely not what I'm looking for. And so I agonized over this, and then I finally sought the advice of a friend who was a member of the offended group, the group that had been the subject of this player's remarks. And he said that he had just bought two pairs for his kids. His point was that no one can tell the endorsement by looking at the shoes and that no new money is flowing to this player from him buying the shoes that are on sale, which is a fair point. I also think that parents out there shopping for their shoes don't have any idea about which players or, or celebrities are connected with the shoes. Now Yeezys are a more extreme case. It was a bigger part of the business, and maybe those shoes are more recognizable. I'm not terribly familiar with them, but it's taking Adidas longer to work through this mess and the merchandise. But B of A's case doesn't have much to do with Yeezy. They say inventory is still too high, but it's improving. They say that the company's communication is improving. It's doing a better job of setting expectations on what sales are look like. It says that expectations in China might be too low. It says that there's progress on margins, and most of all, it says that retro franchises could drive brand heat. Matter, we'll talk more about those retro franchises in a moment, but first, how about a quick break?

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Morningstar, where data speaks. Welcome back. Meta, you said you wear Adidas shoes.

What kind do you wear? I wear the Ultraboost. Hmm.

I don't know that one. What's— what are we talking about here? Is it a running shoe?

Is it a fashion shoe? It's a running shoe and it's—

it's cushiony.

Is it Hoka-y? Well, when they came out, I thought they had a huge sole, but because soles have become so mega, they now seem very reasonable.

Yeah. A lot of sole inflation out there. So Adidas has relaunched something that dates back to before the 1980s, a group of sneakers collectively referred to as Terra sneakers, and they include Samba and Gazelle and Spezial and Campus. So these are casual sneakers today, but they weren't always casual sneakers. They used to be the, the height of athletic technology. The Samba came out in 1949 as a soccer shoe. And the Gazelle and Spezial, those were handball and indoor sports shoes, 1966 and 1979. And then Campus came out in the 1980s. That was a low-top basketball sneaker. But today I think they're just worn for, you know, loafing around. And the shoes are selling well, and they've appeared in some fashion publications. Foot Locker called out the Samba on its Investor's Day. I'm looking at some pictures here to see if anything might be right for me. There's one called Adidas x Gucci Gazelle shoes. That's, uh, that's definitely not that one. And then there's one called Adidas x Bad Bunny Campus Chalky Brown.

That's a possibility.

Bad Bunny is that artist, right? You know what? You're right. It didn't occur to me. Didn't occur to me until just this moment. Bad Bunny is a performer, and that's, uh, I guess who the sneakers are named for. Sorry, Bad Bunny. I don't know. I was thinking about actual bunnies. Anyhow, B of A writes, is Terrace a silver bullet for Adidas brand heat issues? Probably not. However, the franchises are a meaningful step in helping it improve. So that's Adidas, and B of A says to buy. And I guess I'm not fully convinced yet because I've got a new 5-year plan called let's wait and see how it goes. So that's it. I'm not going to get to every shoe company. I'll just say about Nike, that company is an absolute world beater, but the stock just always looks expensive. It's 28 times earnings right now. It has underperformed the stock market over the past 1, 3, and 5 years. I don't think that's a sign of problems at the company. I think the shares were just too expensive to begin with. And Crocs— those aren't really sneakers, those are rubber clogs. What's striking to me about those is I would have sworn when I saw those years ago that that was a passing fad, right? I mean, that's such a departure from other things that people wear. Rubber clogs, I would have figured, were not here to stay. And yet I see them everywhere. I mentioned youth basketball. You see a lot of players who are like taking their shoes off and putting something on to get from here to there, out in the car. They're all putting on Crocs and they're decorating their Crocs. And Meta, you have a Crocs confession to make, a Crocsfession?

Yeah, we're a Croc family, so everyone in my family has a pair or two of Crocs. We don't have the embezzlement though.

What's it called?

Embezzlement.

Uh, embellishments. Yeah. Embezzlement is a financial crime. I think you might've been going for embellishment and I think you landed halfway between that and bedazzle, which for my money should be a second meaning of the word embezzlement. What you're saying is you're not a clog embezzler. Well, not yet. So Crocs is still going strong. The ticker there is CROX. Sales are growing decently. The stock has outperformed over the past 1, 3, and 5 years. Year to date, it's lagging behind, and it's weirdly cheap at less than 10 times earnings. I think people just can't believe that we're still wearing rubber clogs. I mean, investors are saying to themselves, is this what it has really come to? That's what that valuation says to me.

They do seem like a little bit of a one-trick pony. You know, Adidas can make a new pair of sneakers, but if you don't like Crocs anymore, you're not going to buy Crocs.

Do you know what I mean? I do know exactly what you mean, but I wouldn't say they're a one-trick pony. I'd say they're about a 3 or 4 trick pony at this point, although I'm not sure if all of the ponies are going to catch on. There are now Croc shoes that are special for work, like nurses' shoes. There are flip-flops, boots, loafers, platforms, wedges, slides, sandals, slippers. We're way past clogs now, although you ought to see the size of the foam underneath the Barbie the Movie Mega Crush clog. Let me give you some other tickers if anyone's interested in checking these companies out. Deckers Outdoor is DECK and On is ONON. Adidas trades in Germany, but there is an American depository receipt and the ticker there is ADDYY.

So which sneakers, Jack, are you buying?

Probably not the Barbie clogs. I think I just need some more time to work through this. Probably gonna— I might just stick with another pair of New Balances for now while I think it over. And plus, if you think about it, this— the Saturday Night Live risk, which I always face with my fashion, it's really diminished because they've already been through it. They're not going to go back to the well. On that brand. They just did it 10 years ago. That's got to be safe for another 10 years. Thank you for listening. Meta Lutzoff is our producer. You can subscribe to the podcast on Apple Podcasts, Spotify, wherever you listen to podcasts. And if you listen on Apple, please write us a review. No sneaker shaming.

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