Footwear Insight

12 • Footwear Insight ~ January/February 2023 footwearinsight.com 5 Issues to Watch in the Year Ahead WHAT'S NEXT? Fears of a recession in 2022 contributed to the worst performance year for U.S. stocks in 15 years. Analysts are split on the severity and impact of any 2023 recession, but nearly all believe it will occur. By Bob McGee A f ter two years where business developments were dominate d by impacts from a global pandemic — everything from supply chain costs to hiring and product availability — the world is faced with embracing the Year of the Rabbit with plenty of challenges. Some are new. Some are recurring. All will force retailers and brands to confront them to maintain their respective businesses, increase profitability, and embrace the evolving demands of footwear consumers in the U.S. and abroad. 1. A Recessionary Environment? Fears of a recession in 2022 contributed to the worst performance year for U.S. stocks since 2008. Analysts are split on the severity and impact of any 2023 recession, but nearly all believe it will occur. And the Federal Reserve's ongoing effort to bring down inflation, in part by raising interest rates at regular intervals, has CEOs and business leaders increasingly confident that a recession — generally defined as a decline in Gross Domestic Product (GDP) over two consecutive quarters — is on the horizon. Although inflation declined for a sixth consecutive month, year-over- year, to 6.5 percent in November, e Kiplinger Letter predicts a 2023 recession "is now more likely than not." Either way, year-over-year U.S. GDP is expected to slow this year from 2.0 percent in 2022 to 1.1 percent without a recession and 0.5 percent with one. Over the last 75 years, as the Wall Street Journal recently pointed out, corporate profits as a share of GDP — a proxy for profit margins — have declined during nearly every recession. "Under almost any scenario, the economy is set to have a difficult 2023," Moody's Analytics chief economist Mark Zandi recently wrote in a report. Still, both Moody's and Goldman Sachs are optimistic. Moody's is sanguine about consumers ability to weather any economic slowdown this year thanks to the cooling inflation, and Goldman Sachs thinks the two-quarter downturn is avoidable altogether as growth, however miniscule, continues. What does this mean for the footwear industry? It will be forced to navigate the emerging economic landscape with an assortment of measures that may include SKU and workforce reductions coupled with shis in strategic priorities. Some 26 percent of respondents t o t h e l at e s t Wo r l d Fo ot w e ar Business Conditions Survey, which reaches manufacturers, traders, and organizations of various sizes, expect industry employment levels to decline during the first half of 2023. Only 16 percent predicted higher employment. Meanwhile, 40 percent of respondents forecasted "strong" conditions for their respective business over the next month versus the 25.6 percent who called the health of their operation "weak" or "very weak." 2. New Leaders Could Shape the Industry No fewer than six major companies and retailers with significant footwear businesses — Adidas, Puma, Under Armour, Foot Locker, VF Corp. and Designer Brands – have new CEOs in 2023. Two of them, in Foot Locker and Under Armour, are being led by women for the first time. Mary Dillon joined Foot Locker from Ulta Beauty during the fall and Stephanie Linnartz, who le a career at Marriott Intl., will join Under Armour by the end of February. Having female leadership at the top of these two companies is notable in itself, as is the perspective both could bring to the future directions of the businesses. Adidas, in need of a positive turnaround, will be led by former Puma chief Bjørn Gulden — he was credited with revitalizing Puma as its CEO. Puma is now being led by its former CCO, Arne Freundt, 42, who previously oversaw sales for Puma, including retail and ecommerce, and logistics. VF Corp. is searching for a new CEO aer the retirement of Chairman, President and CEO Steve Rendle. Benno Dorer, a VF Corp. independent director and a former Chairman and CEO of e Clorox Co., is VFC's interim president and CEO, while Richard Carucci, a VFC director since 2009, is VFC's interim Chairman. And a planned succession is happening at Designer Brands Inc, with Doug Howe, DSW President set to succeed Roger Rawlins as CEO of Designer Brands Inc. on April 1. ese new leaders will likely have many difficult decisions to make this year, but will shiing the direction and focus of their respective brand(s) be one of them? Time will tell. 3. Casualization, Prices, and Margins Will the trend toward more casual, comfortable fare, which gained momentum during the pandemic, continue to impact the footwear world? And how will casualization continue to impact share of closet for performance athletic and dress shoes? How will brands and retailers serving those segments respond? G e ne s c o - ow ne d Joh nston & OUTLOOK

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