When Foot Locker Inc. (FL, Financial) reported its quarterly numbers in May, the market knocked off $1.4 billion from its capitalization. The footwear giant slashed its earnings forecast by a significant 40% for the year, now projecting earnings per share to range between $2 and $2.25. Since then, shares have basically traded sideways waiting for the next quarterly report, which is coming next week.
2023 presents major challenges for Foot Locker. Cash has been dropping, going from $1.6 billion in 2021 to $313 million at last report. In the last two years, Foot Locker has taken some change in inventory charges that decreased its cash from operations substantially. Cutting its earnings outlook largely stemmed from tepid sales and squeezed margins, prompting the retailer to push for steeper discounts to clear stock.
Historical background
Foot Locker started as a subsidiary of the Woolworth Corp., a company that was historically known for its five-and-dime stores. The first Foot Locker store opened in 1974 in the City of Industry, California. As Woolworth transitioned away from its traditional variety store model, the company increasingly focused on its specialty retail businesses, like Foot Locker.
Eventually, Foot Locker became the flagship brand, and the company changed its name to reflect that in 1997. Apart from its namesake Foot Locker stores, the company operates other retail brands, including Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, Runners Point and Sidestep. However, Foot Locker predominantly serves a lower-income demographic, a group that's felt the brunt of the recent inflation surge. The Champs brand is also feeling the heat, recording a 24% dip in comparable sales during the first quarter.
Adapting to market changes
This drop is likely attributed to a shifting dynamic with Nike Inc. (NKE, Financial), which has pointed out the current market's promotional nature and its ongoing inventory replenishment. As Nike leans into a direct-to-consumer strategy, its relevance for Foot Locker could diminish significantly.
To help navigate this, Foot Locker is broadening its brand palette, bringing in names like On Holding AG (ONON, Financial), Asics, Hoka and Hey Dude. These brands are on the rise and if the retailer wants to stay relevant, it is a good idea to diversify away from Nike anyway.
Diversifying might benefit it in the long term, but it could also stir short-term sales turbulence. Long term, Nike will have more competition. Maybe Foot Locker and Under Armour (UA, Financial) will link up too. If there is a silver lining for Foot Locker, it is in the sneaker domain. The rise of flexible work arrangements has pushed the trend toward casual wear, coupled with a surge in sportswear for daily use. On the whole, society seems to have embraced this across the board.
Market position
Over the decades, Foot Locker has become intertwined with sneaker culture. The brand often collaborates with shoe manufacturers on exclusive releases and has tapped into the culture around "sneaker heads" and the popularity of athletic footwear as a fashion statement. Will that change? Only time will tell.
Competitors
Foot Locker has direct competitors like Finish Line (FINL, Financial), which is another major athletic footwear and apparel retailer, often found in malls and shopping centers similar to Foot Locker. JD Sports is a U.K.-based sports-fashion retail company that has expanded globally. In 2018, it acquired Finish Line in the U.S., bolstering its presence there.
It has big-box competitors like Dick's Sporting Goods (DKS, Financial), which has a broader focus on all types of sports equipment and has a significant footwear and apparel section. Don’t forget about the online competition from Amazon (AMZN, Financial), Zappos and platforms that cater to the sneaker head community - StockX, GOAT and Grailed. Even brands are starting to go direct to consumer more for their new shoe drops.
Competitive advantages
That said, Foot Locker is one of the most recognizable names in athletic footwear retail. The brand has been around for several decades, and its distinctive referee-striped uniforms and iconic logo make it easily identifiable. The company has a broad physical retail presence with stores strategically located in high-traffic shopping centers and malls around the world. This physical footprint provides customers with hands-on shopping experiences, which can be vital for products where fit and feel are crucial.
Foot Locker's loyalty programs, like the FLX Rewards program, incentivize repeat purchases by offering points for purchases, exclusive offers and early access to specific product launches. The company often collaborates with major athletic brands to release exclusive products. These exclusives can drive significant foot traffic to its stores and website, as dedicated sneaker enthusiasts seek out limited-edition items.
Foot Locker's market segments
Apart from its flagship Foot Locker stores, the company has several other retail chains, including Kids Foot Locker, Lady Foot Locker, Champs Sports and Footaction. This portfolio allows them to target different market segments and demographics.
More importantly, with five decades of experience, the company has been through tough times before. Foot Locker's relationships with major athletic footwear and apparel brands ensure consistent product availability and potential collaboration opportunities. The company has accumulated expertise in areas like inventory management, store operations and customer service, while also investing in technology and digital media.
Social media presence
It reaches over 15 million people across social media, which has allowed it to tap into broader cultural movements, engaging in community outreach and supporting initiatives like art and music. These efforts not only bolster its brand image, but also create deeper connections with the target demographic.
Thoughts on valuation
The demand for shoes may cool off slightly, but "sneakerhead" culture and hype for limited edition sneakers is still going strong overall. Sneakers from brands like Nike, Adidas and Jordan Brand still sell out instantly and resell for high prices, indicating demand remains very strong. Secondary market remains active - Sites like StockX and GOAT that enable sneaker resale are still receiving millions of visitors a month. Most importantly, influencers still fuel hype with YouTube, Instagram and others heavily covering sneaker drops and hype launches. So, that’s all good news for Foot Locker.
Investor perspective
Next week, investors will see if the declining fundamentals are here to stay or stabilize. How long the company needs to survive this is still a question that’s up in the air. Michael Burry (Trades, Portfolio) just bought a ton of puts on the Nasdaq and S&P 500 indexes, so the big short investor thinks a crash is coming sooner rather than later.
Financial stability
On a macro level, people still need shoes and if the market demographics hold, athletic shoes and fashionable athletic shoes will still sell. On a micro level, Foot Locker is conservatively financed with just $24 million in interest expenses and $395 million in long-term debt. The recession we are supposed to have is continuing to evade the market, but all the chips are stacked on that side of the economy it seems. Foot Locker could drop even further, but I suspect that it can outlast any short-term volatility.
