Why Is Foot Locker Successful
‘They realized the world has changed’: How Foot Locker …
Foot Locker isn’t letting the death of the mall brand seal its fate.
To turn around slipping sales, Foot Locker has made investments in moving product more quickly and devised a way to drive online customer in stores, and vice versa. The retailer has also generated a lot of buzz over the past year for its investments in digitally native consumer startups, including a $100 million investment in sneaker resale platform GOAT, $12. 5 million in children’s apparel company Rockets of Awesome, a $3 million investment in children’s footwear brand SuperHeroic, and a $2 million investment in Pensole Footwear Design Academy. Foot Locker also invested $15 million last year in women’s activewear company Carbon38 and announced on Friday that it was so confident in the brand that it had invested an additional $10 million into it at the start of the year.
These investments are meant to give Foot Locker more data into what consumers are buying through other channels, and gives the retailer apparel brands whose inventory flow it has more control over.
As a result, Foot Locker has avoided what other mall brands have faced, from declining relevancy to bankruptcy filings. It’s proven itself willing to work strategically with DTC companies — a new phase that has put it in the same conversations as the likes of Walmart and Target — and has several channels that it can turn to for insights into what digitally native consumers are looking for in footwear and apparel.
“[Foot Locker] realized the world has changed, ” Christopher Svezia, a footwear and apparel analyst for Wedbush Securities, said. “They want to know more about what the consumer likes, and knowing what trends change very quickly. ”
During the company’s fourth-quarter earnings on Friday for 2018, Foot Locker announced that comparable store sales in the fourth quarter increased 9. 7 percent. Last year, they decreased by 3. Foot Locker also hit a record total for annual sales in 2018 with $7. 9 billion. On the earnings call with investors, Foot Locker CEO Richard Johnson pointed to August 2017 as the time when the retailer realized “we need to change the way we did business. We started the evaluation process both in internal and in external view of capabilities we might be lacking. ”
Foot Locker makes most of its money through the sales of sneakers and apparel from other major brands — most notably Nike, which accounts for about 70 percent of Foot Locker’s product. In 2017, Nike sales fell in the U. S., while Adidas rose in popularity. Foot Locker wasn’t able to foresee the downturn in Nike’s popularity, and as a result, sales took a hit.
Over the past year, Foot Locker has cleared out inventory by continuing to close stores, and by recognizing, as Johnson said during the company’s first-quarter earnings call this year, that “the peak of product receptivity of our customers is much, much faster from the old days of seed to scale. ”
In terms of the in-store experience, Foot Locker this year added “Nike Pro Athlete” employees to its stores — employees who are trained specifically on Nike equipment who can help push Foot Locker’s most popular products.
Foot Locker is also experimenting more with what it calls “off mall” retail spaces as it closes more stores in malls. One example is its new “Power Stores, ” which are meant to serve as more of an event space, and a “hub for local sneaker culture, art, music and sports. ” Foot Locker plans to launch more than a dozen of these stores in 2019.
Matt Powell, a sports industry analyst for NPD Group, says Foot Locker has also improved this year in blending its digital and in-store experiences, by pushing more customers to order online but pick up their orders in store. Foot Locker also redesigned the mobile apps for many of its stores, including Kids Foot Locker and Lady Foot Locker.
This year, Foot Locker also redesigned its loyalty program so that members can redeem credit at any of the stores under the Foot Locker brand — which includes Kids Foot Locker, Champs and Eastbay.
Nike still accounts for the majority of Foot Locker’s inventory, so if Nike experiences another downturn in popularity, Foot Locker may find itself in a similar position that it was a year ago, which may explain why Foot Locker made so many investments this year in apparel and footwear startups.
Apparel, and specifically children’s apparel has been one of the retailer’s fastest-growing categories for the past several quarters, which is where Foot Locker’s investment in Rockets of Awesome and Carbon38 may give it an advantage. The investment in GOAT can also help give Foot Locker more insight into how long certain types of sneakers remain popular in the resale market.
“I think the idea here is that the traditional label of retailer vs. brand is gone. Nobody is one or the other today, and so a great retailer has to have good brands they control, ” Powell said.
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The Intrinsic Value Of Foot Locker – Forbes
Edit StorySep 23, 2017, 10:40pm EDT|This article is more than 4 years old.
Foot Locker
has experienced strong price growth in the stock market for the past decade, trading as high as $78 in May 2017. But, in the wake of Amazon’s rising power, a whole army of retail stocks have been crushed during the past year – dragging Foot Locker down to attractive price levels. An announced deal in June 2017 between Nike and Amazon added further pressure on Foot Locker’s price. Despite all these headwinds, the company’s current price of $36 per share, potentially offers value investors an entry point.
The Business
Foot Locker is a leading retailer of sports shoes and athletic apparel. The company focuses on high-end athletic footwear and includes all the key brands in its product line. It operates 3, 363 stores in 23 countries located in North America, Europe, Australia and New Zealand. Nike is by far the most important brand sold by Foot Locker – accounting for 68% of all sales last year. FL also organizes many events featuring famous sports stars or special product launch activities.
The Intrinsic Value of Foot Locker
To determine the value of the stock, let’s start by looking at the company’s history of free cash flow. The free cash flow is significant because it represents the company’s ability to retain earnings and grow the business. Most importantly, it demonstrates a return on the principal that might be reinvested back into the business. Below is a chart of Foot Locker’s free cash flow over the past ten years.
As one can see, the results in the past ten years have been reasonable. When looking to the potential for the company to make future free cash flow, conservative estimates are used. To build this estimate, an array of potential outcomes are averaged based on the magnitude of their corresponding probabilities.
Assuming there is a 10% chance for the upper growth rate of 3% per year, a 50% chance for zero growth and a 40% chance for the worst-case scenario of -7% annual growth, a cumulative free cash flow projection was produced.
Assuming these growth rates and probabilities are accurate, Foot Locker could potentially produce an 8. 9% annual return at the current price of $36. Now, let’s discuss how and why those free cash flows could be achieved.
The Competitive Advantage of Foot Locker
Considering that the net profit margins have been between 6-8% during the last 5 years (which is high for a retailer), it is clear that Foot Locker must possess several unique advantages, which should enable it to remain competitive into the future:
Quality/branding. Both Foot Locker itself is well-known and trusted name and also the brands it sells are the who-is-who of the athletic footwear and apparel segment: Nike, Adidas, Jordan’s, Puma, Reebok, Under Armour and much more. Due to its long-term relationship with these companies, Foot Locker has access to the newest models.
Pricing power. Due to its large size and well-established connections, Foot Locker has leverage with suppliers, which allows it to get special deals and offer competitively priced apparel.
Financial strength. Cash & short-term investments alone are equal to its total liabilities. With a current ratio above 5 and a quick ratio of 2, the company has a very strong balance sheet. Add high margins and historically very strong free cash flow rates, and the financials look great.
Stickiness. Foot Locker’s vast presence enables it to provide a unique experience to the customers. While Amazon and other online sellers can be dangerous competitors for low-end products, the high-end segment requires a personal element. When a T-shirt is $20 or a pair of Sneakers cost $50, customers will likely buy online– but before investing $220 in the new “Nike Kobe 11 Elite Low QS 4B”, most customers prefer to buy in a physical store. The impact of the Nike-Amazon deal seems, therefore, to be limited to the lower end products and might provide a layer of protection for Foot Locker.
Regardless of the positive attributes listed above, Foot Locker will struggle to retain market share. The retail sector is becoming extremely competitive and it’s unknown how much revenue will be lost in the coming years. As a result of this concern, the intrinsic model accounted for a decreasing cash flow moving forward.
Opportunity Costs
When looking at various investing opportunities on the market today, let’s compare the expected return of Foot Locker to other ideas. First, one could invest in the ten-year treasury bond which is producing a 2. 1% return. Considering the bond is completely impacted by inflation, the real return of this option is likely below 1%. Currently, the S&P 500 Shiller P/E ratio is 30. As a result, the US Stock market is priced at a 3. 3% yield. If one were to invest in the S&P500, they might purchase a low-cost ETF to take advantage of this return.
Risk Factors
The risks for Foot Locker are definitively real, which can be seen in the recent disappointing numbers. During the first six months of 2017, revenue has decreased by 1. 7% and comparable-store sales were even 2. 6% lower compared to the first six months in 2016. Also, earnings and margins were compressed. Foot Locker’s CEO Richard Johnson blamed this on a lack of new innovative products. If true, these headwinds might turn out to be temporary. Nevertheless, the management has decided to take action in cost reductions, larger online presence and increased communications with vendors to find and capitalize on new trends. These are the major risks:
The threat by Amazon and other online sellers.
Competition by other brick-and-mortar sports stores.
The lack of innovative products might last longer than expected. This is a real risk, which would hurt all sellers of sports shoes. Since demand can be expected to remain strong in the future – no technology will make sports shoes redundant in the foreseeable time – we can expect innovation to catch up sooner or later. Foot Locker’s financial strength allows it to wait a little longer, if necessary.
Foot Locker is highly dependent on sales of Nike products – which make up 68% of its overall sales. If Nike ever pulled out of Foot Locker, this would be disastrous for there’s ability to sustain projected cash flows. Still, this is considered highly unlikely, since Nike also strongly benefits from a close relationship with the world’s leading seller of athletic footwear.
Summary
Foot Locker has some interesting attributes that might make it a good value investing pick. The Amazon-Effect is currently impacting the price of the stock. Although many of the reasons why investors are selling the stock are based on growth concerns, it appears the stock might be oversold. Even after assuming the future free cash flow might contract at a sizable amount, the business could still produce a return that’s three times higher than the rest of the S&P 500.
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Here’s How Foot Locker Is Diversifying for Success
Brought to you by WBR Insights
As the physical retail finds itself continuing to fight a war of attrition with ecommerce, brands with a brick and mortar priority are having to find ways to stand out and give consumers a reason to visit physical stores over their online counterparts.
Digital technology is providing part of the solution to this riddle. Amazing innovations are enabling retail brands to provide unique technological customer experiences which consumers simply can’t get online. However, digital transformation is not the whole answer and there is plenty of room for innovation in other areas as well – it just takes brands thinking outside of the box a little to discover them.
This is the strategy taken by sportswear and sneaker brand, Foot Locker which has been putting a seriously diverse strategy into action.
Foot Locker
The crux of the new Foot Locker strategy is to rebrand itself as not simply a great place to buy the latest footwear, but rather a place where youth culture can feel empowered. In other words, Foot Locker wants its stores to become social hubs for the nation’s youth, not simply a retail outlet.
“We’ve changed a lot, ” said Foot Locker President and CEO, Richard Johnson. “The pace of change isn’t going to slow down. The consumer moves fast. We’ve got to be agile to adapt to it. [… ] All these things we are identifying to invest are capabilities we want to add to the ecosystem that serves youth culture. ] None of them are distractions. ”
Foot Locker has begun this process by making a significant investment into startups which are focused around youth culture. Kicks resale business Goat, sneaker design academy Pensole, online children’s clothing subscription service Rockets of Awesomeness, and kids’ shoe and apparel brand Super Heroic have all been brought under the Foot Locker umbrella and has helped the brand establish itself as being about more than sneakers.
In particular, the investment in Pensole is helping Foot Locker give its visitors a way to engage in real fashion design. As a proof of concept, a show design by a Pensole creator has already been turned into a real-life shoe, manufactured by Adidas and sold exclusively in Foot Locker stores. Goat is still in early stages of development, but Super Heroic and Rockets of Awesomeness products are already available in Kids’ Foot Locker at the brand’s flagship Times Square location.
“I couldn’t be more proud or excited for our company to partner with such high quality and diverse group of entrepreneurs, ” said Johnson referring to Super Heroic co-founder Jason Mayden and Rockets of Awesome founder and CEO Rachel Blumenthal. “Our goal moving forward will be to empower the growth, while harnessing the insights capabilities and innovation that can help shape our business for the future. ”
However, perhaps the most interesting part of Foot Locker’s strategy of youth empowerment can be found in a new type of store location which is beginning to spring up around the world.
A New Breed of Foot Locker
First trialed in the UK cities of Liverpool and London, Foot Locker has now begun rolling out its new store concept in its home market of North America. Starting in Detroit and Philadelphia, the new “Power Stores” come complete with unique products and experiences – often tailored to local tastes.
The Power Stores are strongly focused on customer experience and aim to fulfill the Foot Locker mission of youth empowerment by becoming hubs for not just local sneaker culture, but also art, music, and sports as well. Not only will they have an extensive range of Foot Locker products, but they will also have space to host community events such as popup nail salons and Xbox gaming tournaments.
The stores also serve as innovation centers as they take a leaf from Amazon Go and install RFID sensors in their products. This allows Foot Locker to analyze which products are picked up most often, how much time customers spend looking at them, which ones get put back, and which ones get purchased. This data then allows Foot Locker to deliver more intelligent personalization and product recommendations
Final Thoughts
“We suddenly missed the shift with the consumer, ” concluded Johnson. “We didn’t realize how quickly the consumer was moving. That was the epiphany moment that we have to go faster. ] Suddenly the customer told us: ‘Hey, we are in charge. We don’t want to just transact business with you. ‘ For us to go from the leading global retailer of athletic-inspired shoes and apparel to having a purpose of empowering and inspiring youth culture is a dramatic difference. ”
You can hear Foot Locker’s Vice President and Head of Global Retail Design, Kambiz Hemati, speak at Future Stores Miami 2020, taking place in February at the Miami Marriott Biscayne Bay, FL.
Download the agenda today for more information and insights.
Frequently Asked Questions about why is foot locker successful
What makes Foot Locker special?
Due to its large size and well-established connections, Foot Locker has leverage with suppliers, which allows it to get special deals and offer competitively priced apparel. Financial strength. Cash & short-term investments alone are equal to its total liabilities.Sep 23, 2017
What is Foot Locker strategy?
The crux of the new Foot Locker strategy is to rebrand itself as not simply a great place to buy the latest footwear, but rather a place where youth culture can feel empowered. In other words, Foot Locker wants its stores to become social hubs for the nation’s youth, not simply a retail outlet.
How does Foot Locker market?
The company uses its omni-channel strategy, which markets to customers online and via mobile apps as well as through physical locations. Its sites offer some of the largest online product selections and provide a seamless link between e-commerce and physical stores.
