Shoes – we all need them, but the choice between looks and function depends on our financial standing. Which makes shoes a clear proxy for consumer spending. In China roughly $40bn in shoes are sold domestically each year, about the same amount that it exports. That demand has buoyed China’s footwear stocks such as Belle with a market value of $15bn, which reports earnings this week, and smaller rival Daphne, which released results on Monday.

The long-term story – rising incomes and urbanisation – for shoe demand in China looks good. But both companies face nuances on the ground. Belle’s brands – with punchy European-sounding names from Belle to Tata and Staccato – are some of China’s most popular. Yet Belle relies heavily on department stores in major cities to sell shoes and sales growth from this channel has slowed. Hence Belle’s same store sales growth more than halved to 8 per cent year on year in the fourth quarter from the prior nine months. Daphne, by contrast, derives 70 per cent of its sales from standalone stores in China’s smaller cities – where income growth is outpacing the average. This has helped same store sales at Daphne continue their 25 per cent annual clip. It also explains why Daphne’s one-sixth expansion in its store network boosted revenues in 2011 by almost one-third, while Belle is expected to realise smaller revenue growth and through a 25 per cent expansion. With average stores per 1m of China’s population set to grow by 60 per cent by 2015 in China’s smaller cities, twice as fast as in first tier cities, according to Nomura, Daphne still has ample room to grow further.

Investors need to see more evidence from Belle that it is moving away from upscale department stores to mass market and ecommerce. Only then can it justify trading at a premium of one-fifth to Daphne at 19 times this year’s earnings.

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