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From the Survey: Foot Locker
Foot Locker (FL) is the largest retailer of athletic footwear and apparel in the United States, with 3,500 stores worldwide. The company operates in two divisions, Athletic Stores and Direct-to-Customers. Although the Foot Locker brand is the most widely recognized and established, the company’s portfolio includes other prominent brands that fall into the Athletic Stores category, such as Lady Foot Locker, Kids Foot Locker, Champs Sports, and Footaction. The retailer also owns Eastbay, which is a Direct-to-Consumer catalog offering unique and customizable products that often cannot be found in stores. Foot Locker was established in 1974 and is the successor to the Woolworth Company, which was founded in 1879. Today, the retail chain is focused on increasing its global footprint and sales through an attractive assortment of products, close affiliation with popular sports, and enhanced marketing efforts.
Within its stores, the retailer focuses primarily on Basketball and Running shoes and offers a tremendous amount of variety in both categories. Of late, the company has been taking advantage of the growing trend in the United States towards running and healthy lifestyle choices. In the last year, each of the major athletic shoes manufactures introduced its own version of a high-end and light-weight running shoe; Zig Fly from Reebok, Free Run and LunarGlide from Nike, and ClimaCool from Adidas. These products have been selling extremely well and the trend isn’t showing any signs of decelerating.
The same cannot be said of basketball-related sales, however. This isn’t the first time the retailer has had to contend with the possibility of an NBA lockout. Basketball fans will remember the 1998-1999 season for the departure of Michael Jordan, but that season also marked the third lockout in NBA history. The season was delayed from its usual start date in October until February. This was a major setback for Foot Locker at the time, one that could conceivably reemerge again. With that said, basketball’s popularity today is as strong as ever, thanks to a new class of superstars and rivalries emerging onto the stage. If the owners and players can come to an agreement, Foot Locker should be able to capitalize on the momentum of the sport going forward.
There is also a shift in strategy going on today within the company’s stores. As we mentioned earlier, Foot Locker has a strong portfolio of brands in addition to its namesake store, including Footaction and Champs Sports. The company tries to differentiate between store groups primarily through apparel. Indeed, if one were to step into a Footaction versus a Foot Locker, the apparent differences would be immediately noticeable in the type of apparel that’s on display, with about 35% of the merchandise being unique to the specific group. For example, Footaction sells jeans and has a strong presence in Nautica and Levi’s whereas Foot Locker is entirely focused on selling sporting apparel and more technical clothing. By offering this level of distinction, the two groups can operate in the same shopping mall without compromising each other’s sales.
The idea is that people buy clothes more often than they buy shoes and once they’re in the store, they might just buy a pair of shoes to match their new outfit. Marketing itself this way works for Foot Locker, because its stores are often in close proximity to each other and it wouldn’t make sense to compete for customers. As a mature company, Foot Locker has relatively few avenues of growth left to pursue, but an increased focus on apparel could be just the spark needed to draw-in more customers and bolster sales. In fact, apparel sales rose 20% in the most recent quarter, compared with the 12% sales growth rate of the whole business.
This retail company could be of interest to income-seeking investors since it offers a worthwhile dividend of 3%. As mentioned above, Foot Locker still has ample opportunity to raise earnings. Another way is to expand the operating margin, which is below that of rival Finish Line (FINL) and still well-bellow Foot Locker’s own peak levels. A return to peak profitability would boost profits and likely drive the stock price higher. With that being said, the NBA lockout poses a serious risk factor to this stock, so it may be prudent to wait for a resolution before taking a position.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.