MASSIVE OMINOUS NUGGETT

Here's a nugget that gets me even more beared-up about footwear margins in 1H09. Chinese export data released last night shows that almost half of the shoemakers in China's Pearl River Delta closed shop in the first half. I repeat - they lost 2,331 producers out of about 4,750 (49%).

Government officials suggested a trend whereby the big got bigger, the smaller have sought out niche markets, and the middle ranks have been going away. Yes, capacity is consolidating, and we'll see more. Bad, obviously, for most companies doing business with them.

Another telling statistic is that 1.35bn pairs were shipped in the first 5 months of the year - a decline of 15.5%. That said, export dollars actually rose 9.4%. This is especially significant in that the dollar value of shoes sourced in the Guangdong province account for about $10bn US. Even if I assume that only a third of these are destined for the US athletic market, it still represents about 2/3 of the market.

Ok, so let's get this straight. Half of the capacity in the most important region for global footwear production has gone bust, and there was a subsequent 2,600bp gap in unit production vs. price (in US$). This brings me back to one of the themes in the footwear space that I've outlined quite a bit (see all of my earlier industry postings) - investors are not cautious enough on margins in this space.

Exhibit courtesy of Hong Kong Trader