Footwear

# Executive Summary * The footwear industry is currently navigating significant near-term margin pressure stemming from geopolitical tariffs and an accelerated strategic diversification of global supply chains away from China. * Compounding these cost challenges, persistent macroeconomic headwinds are dampening consumer discretionary spending, leading to sales declines for some market participants while potentially favoring value-oriented brands. * A structural and accelerating shift towards Direct-to-Consumer (DTC) channels is creating a clear performance gap, with digitally-native brands and those with strong DTC execution outperforming legacy retail models. * Major consolidation and strategic restructuring are reshaping the competitive landscape, highlighted by significant acquisitions and private equity buyouts. * Technological innovation in materials and manufacturing, coupled with robust brand strength and agile supply chain management, remain critical long-term differentiators for achieving sustainable growth and profitability. ## Key Trends & Outlook The most significant headwind facing the footwear industry is the direct and quantifiable impact of geopolitical tariffs, which is compressing gross margins and forcing an accelerated strategic diversification of supply chains away from China. This pressure is not theoretical; new tariffs directly impacted Steven Madden's Q2 2025 wholesale gross margin, causing a contraction to 30.0% from 33.1% in the prior-year period. Similarly, Under Armour noted a 275-basis-point increase in costs from higher U.S. tariffs in Q2 FY26. This directly erodes profitability and forces companies to choose between absorbing costs or risking demand destruction by raising prices. In response, companies like Steven Madden are aggressively shifting production, aiming to reduce China sourcing to mid-single digits by Spring 2026, a sharp acceleration from approximately 71% sourced from China in 2024. Caleres is also accelerating sourcing diversification, aiming for approximately 75% of direct product sourcing to be outside of China by the second half of 2025. This trend is immediate and will continue to be a primary driver of costs and strategic focus for the next 12-24 months. Compounding these cost pressures, persistent inflation and higher interest rates are weakening consumer discretionary spending, directly impacting top-line performance. This is evident in the sales declines reported by retailers like Foot Locker, which saw comparable sales decline 2.6% in Q1 2025. Under Armour also experienced a 5% year-over-year revenue decline in Q2 FY26. This challenging macroeconomic environment creates a potential advantage for companies positioned in the value and comfort segment, such as Skechers, which focuses on offering style, comfort, quality, and innovation at an affordable price, potentially allowing it to capture market share from more price-sensitive consumers. Amidst these challenges, the primary opportunity for growth and margin expansion lies in the continued shift to Direct-to-Consumer (DTC) channels. Brands like On Holding are seeing DTC net sales surge by 54.3% at constant currency in Q2 2025, elevating its mix to a new Q2 high of 41.1% of total sales. The core risk for the industry is that the combination of tariff-driven cost inflation and weakening consumer demand will lead to a prolonged period of margin erosion and intense promotional activity, particularly for companies without strong brand differentiation or an efficient DTC channel. ## Competitive Landscape The global footwear market, while dominated by industry giants, is intensely competitive, forcing other players to adopt distinct strategies to gain market share and differentiate themselves. Some players, like On Holding, focus on commanding premium prices through technological innovation. On Holding's entire strategy is built on proprietary technologies such as LightSpray, which enables the creation of an ultralight shoe upper in a single, automated step in just three minutes per shoe, and its proprietary cushioning systems. This allows the company to establish itself as a "premium global sportswear brand" operating at the intersection of performance, innovation, and fashion, achieving industry-leading gross margins. Others, like Skechers, have successfully captured the mass market by centering their brand on comfort and value. Skechers explicitly defines itself as a "Comfort Technology Company," offering proprietary systems like Hands Free Slip-ins and Arch Fit. This strategy has made it the world's third-largest footwear company and helped its DTC sales surpass $1 billion in a quarter for the first time in Q2 2025. A third approach, exemplified by Steven Madden, relies on speed and agility to capitalize on fast-moving fashion trends. Steven Madden differentiates itself through an "acute focus on fashion trends" and a "test-and-react strategy" that prioritizes rapid design, production, and distribution. Its acquisition of Kurt Geiger, completed on May 6, 2025, for approximately £289 million, is a strategic portfolio move to enhance its international presence and accessories business. The primary competitive battlegrounds are in DTC execution, supply chain resilience, and brand building. Recent M&A activity, such as Foot Locker's $2.4 billion acquisition by DICK'S Sporting Goods and Skechers' move to go private via an acquisition by 3G Capital, suggests a trend towards consolidation for scale and strategic repositioning within the industry. ## Financial Performance Revenue performance is sharply bifurcated across the industry. This divergence is driven by brand momentum and exposure to macroeconomic headwinds. Innovative, high-demand brands are achieving explosive growth, while others more exposed to the cautious discretionary consumer are experiencing declines. This is best illustrated by On Holding's (ONON) robust +38.2% constant currency growth in Q2 2025, fueled by strong brand heat and global expansion. In stark contrast, Foot Locker (FL) reported a 4.6% year-over-year revenue decline in Q1 2025, reflecting broader challenges in the wholesale retail environment and macroeconomic headwinds. {{chart_0}} Gross margins are under significant pressure and diverging based on pricing power and channel mix. The primary driver of margin compression is tariffs, which directly increase the cost of goods. The key differentiator for margin strength is a high mix of DTC sales, which carry inherently higher margins than wholesale. The power of a premium DTC model is evident in On Holding's (ONON) robust 65.7% gross profit margin in Q3 2025. Conversely, the severe impact of tariffs is clear in Steven Madden's (SHOO) wholesale gross profit margin, which fell to 30.0% in Q2 2025, directly impacted by new tariffs. {{chart_1}} Major strategic M&A and consolidation are the dominant capital allocation themes. Companies are using M&A to gain scale, enter new markets, or transition to private ownership to execute long-term strategies away from public market pressures. This trend is defined by two landmark deals: Foot Locker's (FL) $2.4 billion acquisition by DICK'S Sporting Goods, completed on September 8, 2025, to create a retail powerhouse. Additionally, Skechers (SKX) moved to go private via an acquisition by 3G Capital at $63 per share, completed on September 11, 2025, to focus on its next phase of growth away from public scrutiny. The industry's balance sheet health is mixed. Financial strength varies widely, with some companies maintaining fortress-like balance sheets, providing flexibility for investment and weathering downturns, while others are taking on debt to fund acquisitions or are facing cash flow pressures from operations. While some players like Columbia Sportswear Company (COLM) maintain a "fortress balance sheet" with no outstanding debt on its $500 million committed revolving credit facility, the pressures on the retail side are visible in Foot Locker's (FL) negative $61 million in free cash flow in Q1 2025. {{chart_2}}