Foot Locker Desperate for the Return of Malls and Basketball
Photo Credit: Foot Locker website
Basketball is at the core of Foot Locker’s business and malls are the key to getting the latest sneakers into the hands of consumers. The pause of basketball across the country, combined with anemic foot traffic to malls, is putting massive pressure on the sports retailer’s business.
COVID-19 dents sales: Sales and profits were weaker-than-expected. Q1 total sales fell 42.8%, compared to sales growth of 4.6% last year. Management did not provide Q2 or fiscal year 2020 guidance. In an effort to preserve cash, the company suspended its dividend as of Q2. Foot Locker stores have been shut down since March 17th.
Malls: About two-thirds of Foot Locker's U.S. store base are in malls, and according to Susquehanna analyst Sam Poser, “much of FL's future success or lack thereof will likely be the result of how well a given mall is able to create a safe environment for consumers and employees.”
Mall opening stats: Foot traffic to reopened malls has been underwhelming. Simon Properties, the largest mall operator in the U.S., has started to open doors in states that have loosened stay-at-home orders. From May 3 through 10, overall foot traffic at Simon Properties’ 46 reopened malls was about 25% of its total on January 1, according to anonymized cell phone location data from geospatial analytics company Orbital Insight.
Banking on basketball: Foot Locker’s business is largely dependent on basketball. According to B. Riley FBR analyst Susan Anderson, “Foot Locker’s core business in the U.S. is basketball. A slowdown in trends of basketball footwear sales could add significant pressure on top-line sales and earnings.”
NBA Season outlook: With the NBA season on hold and youth basketball leagues across the country suspended, consumer demand for footwear is at risk. After bringing the season to an abrupt halt on March 11, the NBA’s management is in serious discussions with Disney about using Orlando’s Walt Disney World Resort as the NBA’s playing site in order to resume the 2019-20 season, according to The Athletic.
The Last Dance Effect: ESPN’s 10-part documentary about Michael Jordan is providing a boost for Foot Locker, which indicated styles such as the Air Force 1 remain in strong demand.
Frenemy relationship with Nike: Foot Locker is dependent on the flow of products from brands such as Nike. COVID-19 has accelerated the shift to online sales and away from physical retail, which could make Foot Locker stores less profitable as the decline of the mall becomes more pronounced, according to Anderson.
While Foot Locker sales continue to grow faster online compared to in stores, Nike has also been leveraging its own digital DTC platforms. According to Poser, “The question of how much of Nike's marketing prowess will be used to drive consumers to Foot Locker, rather than using its newfound strength to directly drive sales to Nike stores, remains.”
Piper Sandler analyst Erinn Murphy, who has a NEUTRAL rating and $21 price target for Foot Locker, said in a recent note that “Long-term, we worry that the current digital transformation will ultimately fuel customers to brand.com sites.” Murphy also expressed concern with Foot Locker’s inventory position, which increased 20.4% year-over-year.
