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Royce Funds Commentary: Can Small-Cap Footwear Outrun a Recession?

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Footwear is a really interesting investment, almost all the time, especially now though. Historically, women buy more shoes than men, in good times and bad times, so it tends to be very recession resistant. It's a low-cost way to improve a wardrobe. But the shoe business right now is under a cloud, and I think it's under a cloud because of tariffs.

The good companies, I believe, over the next year or two have a number of ways to offset that. They're going to get concessions from their overseas manufacturers, they're going to move production away from China to other countries, and they're going to raise prices. I think the companies are very adaptable. I think the market really doesn't appreciate that, and that's part of why you're getting great companies at a discount right now.

One example would be Designer Brands. It used to be called DSW for their DSW stores, but they did a large acquisition that's going to help them source their own private label product, which is very important in the shoe business and should really help them improve their profitability. Some of the other great things they've done: they've put kids shoes in all their stores, so that mom can now buy shoes for the kids, and they're experimenting with nail bars. They want to make themselves more relevant, so they can't be disintermediated by Amazon.

Important Disclosure Information

The thoughts and opinions expressed in the video are solely those of the persons speaking as of July 10, 2019 and may differ from those of other Royce investment professionals, or the firm as a whole. There can be no assurance with regard to future market movements.

The performance data and trends outlined in this presentation are presented for illustrative purposes only. Past performance is no guarantee of future results. Historical market trends are not necessarily indicative of future market movements.

This article first appeared on GuruFocus.