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Nike Pullback Hits Foot Locker Stock Hard

Foot Locker shares plummeted Friday morning as Nike’s plans to pull back on shipments prompted the retailer to forecast declining sales for 2022.

The company expects revenue will fall 4 percent to 6 percent in full-year 2022. Comparable sales are forecasted to drop 8 percent to 10 percent. Though the company did not parse out how much individual factors are expected to contribute to these declines, president and CEO Richard Johnson said supply chain disruptions and headwinds from lapping last year’s stimulus—in addition to the changes surrounding Nike—will negatively affect sales as well.

Foot Locker share prices plummeted more than a third in the hours after markets opened Friday. The company’s stock price recovered ever so slightly as the day progressed, but remained down 30 percent at market close. In the past six months, Foot Locker­ stock has dropped 50 percent.

In a Nutshell: Nike has made no secret of its direct-to-consumer ambitions. The years-long project has seen the company sever ties with a number of wholesale accounts, including DSW, which will be selling its last Nike products this year. It famously said it was focusing on “premium” retail partners when it decoupled from Amazon in 2019. In December, Nike chief financial officer Matthew Friend told investors that the company had reduced its number of wholesale accounts in North America by roughly 50 percent in four years.

Foot Locker, however, is significantly more invested in selling Nike products than a retailer like DSW, where the Swoosh accounted for less than 4 percent of revenue in 2019. Nike has recently accounted for the overwhelming majority of Foot Locker’s products, including 75 percent in 2020 and 70 percent in 2021. This year, it anticipates the brand will represent just 60 percent of its total mix. Starting in the fourth quarter and moving forward, it does not expect Nike will comprise more than 55 percent of its product spend. As of the fourth quarter of last year, this was down to 65 percent.

Johnson expects that, in the longer term, Nike’s share will sit between 50 percent and 55 percent. This range, he said, will bring the company back to where it was in the mid- to late 2000s.

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“We expect to grow our non-Nike brands at a much faster rate,” chief financial officer Andrew Page added. “And so therefore, that penetration could go down just as a sheer result of the growth of our other businesses.”

During the pandemic, Foot Locker developed a “heavy concentration in a very few SKUs,” Johnson said. Though that “clearly” worked well at the time, these products are exactly where Nike is now pulling back, he noted. According to Johnson, the company will still have access to “all” those products. Fewer units of those SKUs, however, will flow its way.

“Part of the effort that we’ve had ongoing with Nike is to diversify our mix with them,” Johnson said. “We got… concentrated in those silhouettes, and, again, part of it was the thought of—in 2020—the thought of survival and having to focus on the inventory management, the prioritization of those key products. And as I said, it allowed us to be very successful in ’20 and ’21. But as we got further into ’21, it became very clear that we needed to diversify our offering for our consumers, and that coincides with Nike’s DTC growth.”

Though “this journey” began just prior to Covid, the larger shifts that the CEO discussed Friday emerged from discussions with Nike in late January, he said.

“Part of the pull model that works in our industry is the scarcity model,” he added. “One of the things that Nike does the best is they control the flow of these high-heat products into the marketplace, which keeps the demand high. So, again, they will certainly benefit their DTC with some of that. We’ll continue to benefit from that. But our biggest benefit will be broadening our assortment with them and bringing other brand partners in.”

Outside of Nike, Foot Locker is seeing strong sales growth. While total sales climbed 6.9 percent in the fourth quarter, Johnson said “non-Nike comp growth” exceeded 30 percent. Specifically, he called out the retailer’s new exclusive partnership with Reebok, a “great” LaMelo Ball launch with Puma, collaborations with Crocs and Carats and brands like Adidas, New Balance, Timberland and Ugg.

Despite its pivot away from Nike, Foot Locker will remain a “strategic partner” of the footwear brand, Johnson noted. The executive highlighted their work in kids’ basketball and sneaker culture, in particular. “I feel great about the relationship,” he added.

“I think that Covid has allowed us all to see that the consumer is changing, the consumer behaviors are changing,” Johnson said. “Our consumer is clearly saying that they want choice and that multi-brand destinations matter. And when… 75 percent of your purchases are with one vendor, it doesn’t leave a lot of space in your store for choice. So that’s part of what we’re looking at. So really, it’s an acceleration of conversation that’s been going on for a couple of years.”

Net Sales: Total Foot Locker sales grew 6.9 percent to $2.3 billion in the fourth quarter ended Jan. 29 compared to the prior-year period. Excluding the effect of foreign exchange rate fluctuations, total sales increased 8.2 percent. Comparable sales—the fourth quarter was the first full quarter for both WSS and Atmos, two retailers it bought in the third quarter for a combined total of nearly $1.1 billion—inched up just 0.8 percent.

Apparel outpaced footwear in the fourth quarter, growing 30 percent. The category, which reached $1.4 billion in sales in the full year, saw the launch of the menswear brand Wacker in the third quarter and the womenswear brand Cozi in December.

North America comps fell 4.5 percent in the quarter amid an “accelerated drag” from the wind-down of Footaction, Page said. In Europe, the Middle East and Africa, overall comps grew in the high teens, while in Asia-Pacific, they were up more than 20 percent.

Foot Locker’s fiscal 2021 sales totaled $9 billion, an 18.7 percent jump against the prior year’s $7.5 billion and a 11.9 percent bump versus 2019. Excluding exchange rate fluctuations, sales grew 17.8 percent year over year. Comparable-store sales climbed 15.4 percent.

Net Income: Foot Locker reported a net income of $103 million, or $1.02 per share, in its fourth quarter, down from $123 million, or $1.17 per share, in the prior-year period. On a non-GAAP basis, however, the company earned $1.67 per share, a 7.7 percent year-over-year increase.

Gross margin remained relatively flat, inching down 10 basis points as strong merchandise margin gains offset occupancy deleverage.

The company recorded a net income of $893 million, or $8.61 per share, in fiscal 2021, a 179.5 percent increase compared to 2020’s $323 million, or $3.08 per share. Compared to 2019, earnings per share grew 91.3 percent.

On a non-GAAP basis, Foot Locker earned $7.77 per share, a 176.5 percent jump from 2020 and a 57.6 percent increase from two years ago.

CEO’s Take: Another focus for Foot Locker in 2022 is its shift to bigger box off-mall formats. Based on the success of its first 50 “global community and power stores,” it is planning to grow these formats to approximately 300 locations over the next three years. Overall, however, the company expects to decrease its square footage by about 2 percent in 2022 and its door count by about 3 percent.

“Our community and power stores enhance both our off-mall presence as well as our connection with communities by bringing life to a wider and richer, more locally relevant product assortment,” Johnson said. “These stores help us build authentic relationships with our customer at the hyperlocal level by incorporating local elements into the physical designs, partnering with local businesses and organizations and engaging local artists, athletes and influencers.”