“Nike Effect” Working, Shares Sit Just Below All-Time High

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Nike’s (NKE) transformation from wholesaler to mobile-first DTC retailers has been successful (+16% YoY in ’17 vs. overall corporate growth +6% YoY) and the company’s market cap ($118.84 billion) continues to rise as a result, despite recent C-level turnover. Dubbed the “Nike Effect” by CEO Mark Parker, the revamped strategy has NKE focusing on just 40 retailers while prioritizing its direct to consumer sales channels (think: storefronts, nike.com, Nike app, SNKRs app). Nike uses the data collected from its 100 million “members” to create a more personalized/rewarding shopping experience on those channels and to identify underserved demographic groups (think: females). Wedbush analyst Cristopher Svezia recently wrote that he expects Nike’s DTC sales to “push overall sales into positive territory in fiscal 2019.”

Howie Long-Short: Nike decision to control the means of distribution has helped the company alter its image with “sneakerheads”, which soured when the company began to overproduce its most desirable lines (i.e. Jordan). The lack of buzz surrounding the brand contributed to the loss of market share it experienced in 2017 (-1.6% to 32.9%). While limited edition drops make up a small portion of Nike sales (+/- 5%), the enthusiasm generated by the company’s most engaged consumers helps the perception of the brand and leads to mainstream consumer sales.

The “Nike Effect” has been validated by a “significant reversal of trend in North America”, growth in DTC sales and improved international sales (+24% YOY in China, +19% in Middle East and Africa) as the company beat analyst expectations (revenue + 7% to $8.98 billion) in fiscal Q3 ‘18.Shares closed at $71.31 on Tuesday, just below their all-time $72.19.

Unfortunately, Nike’s old brick and mortar partners (think: FL, FINL) have struggled to replace the revenue Nike product generated. FINL reported same store sales declined -7.9% in Q4 ’17, while FL reported same store sales were down -3.7% during that same period. FL will report Q1 ’18 financials on Friday 5.25.

Fan Marino: Limited edition Nike sneakers (including Jordans) are distributed through Nike’s SNKRs app (separate from NIKE app), a digital platform that gamifies (including a virtual queue) the shopping experience for company’s most wanted products. On June 23rd, SNKRs will have one of this summer’s most highly anticipated sneaker drops, the Travis Scott “Cactus Jack” Air Jordan 4. While the shoes will retail for $225, the current asking price on GOAT is $2,015; so, unless you have a lot of cash to burn, make sure to download the app, have your credit card information stored and be ready for the alert at 10a on 6.23.

Fun Fact: Prior to being acquired by NKE (in ’16) and rebranded as SNKRs, the community building and shopping app was named “Virgin Mega” and backed by Richard Branson’s Virgin Group. Financial terms of that deal were not disclosed.

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JD Sports Fashion Agrees to Purchase Finish Line

JD

JD Sports Fashion (LON: JD) has agreed to purchase Finish Line Inc. (FINL) at a $558 million valuation ($13.50/share). The price represents a 28% premium on share values at the March 23rd close ($10.55), the day prior to the deal’s announcement. The transaction, subject to shareholder approval, is not expected to close before June 1st.

Howie Long-Short: As noted back on October 3rd, FINL added a “poison pill” and “shareholder rights” plan to bring SPD to the negotiating table (2nd largest shareholder); so, the offer that’s been accepted by the FINL board is particularly noteworthy on several fronts. Should the deal close, it would give JD a significant U.S. presence. It would also wrestle control of the company from Sports Direct International (LON: SPD), a direct competitor with a 9.9% stake (and 32% indirect interest) in the U.S. retailer. The market seems to believe SPD is going to counter as FINL shares closed last week at $13.54, above the proposed per share purchase price.

Fan Marino: While FINL reported mixed Q4 results (overall sales +.7%, net income of $16 million+ following a loss year-ago period, same store sales -7.9%), one segment of the business that performed well was Finish Line’s Macy’s (M) business (+8.5% YoY). For those of you who haven’t been to a mall in the last 5 years (like me), in September 2012 FINL became M’s exclusive partner for athletic footwear; introducing FINL branded footwear shops in 450 U.S. stores (and on macys.com). It’s interesting (if not coincidental) that when FINL signed the deal, the company projected it could boost annual sales by 30% ($350 million) on net income of $1.4 billion. The company reported FY17 sales of $1.844 billion.

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Amazon Takes on The Sports World; 25 Companies That Will Be Affected

Amazon has been credited with killing everything from book stores to electronics retailers since its 1994 launch. Now, with a market cap +/- $570 billion and $16 billion in annual operating cash flow, the company is taking aim at the sports world. In our final newsletter of 2017, we look at 4 of AMZN’s recent initiatives and the 25 companies most likely to be affected in 2018.

Amazon Expands Brand Registry Program, Now Includes Nike

In June, Nike (NKE) agreed to join Amazon’s brand registry program; seeking to curb counterfeiting and non-licensed selling within the e-commerce marketplace. The partnership also supports the athletic apparel and sneaker brand’s initiative to boost revenue through a shift to digital and DTC sales, relying less on struggling retailers. Competitors Adidas (ADDYY) and Under Armour (UAA) already have direct-sales deals in place with AMZN.

Names to Watch: FINL, DKS, FL, HIBB, BGFV; LON: SPD, LON: JD

Howie Long-Short: Athletic apparel and sneaker retailers count on NKE (70% of FL business comes from NKE); but NKE launched its “Consumer Direct Offense” strategy in fiscal Q1 ’18, increasing e-commerce business 19% YOY. Mediocre retailers beware, the company is maintaining just a few dozen wholesale relationships as it looks to increase its e-commerce business (from 15% of revenue to 30% over the next 5 years).

Amazon Entering Private-Label Sportswear Business

In October, Amazon (AMZN) announced it was entering the private-label sportswear business and working with the same Taiwanese suppliers, Makalot Industrial Co. (TPE: 1477) and Eclat Textile Co. (TPE: 1476), that some of the world’s biggest athletic brands use. Elcat’s involvement is particularly noteworthy as the company manufactures high-performance sportswear for Nike (NKE), Lululemon Athletica (LULU) and Under Armour (UAA).

Names to Watch: NKE, UAA, ADDYY, LULU; TPE: 1476, TPE: 1477

Howie Long-ShortAMZN wants to be in the private-label clothing business because it pushes retailers to sell inventory on the e-commerce site. Should a retailer choose not to, AMZN will simply produce the item themselves and compete directly against the brand.

The Pursuit of Exclusive Broadcast Rights

In September, the company hired Brian Potter to lead its sports video business. In November, Jim DeLorenzo, head of sports, Amazon Video, said the company was pleased with viewership numbers, engagement and the reliability/quality of the cloud-based streaming service during its season long experiment streaming Thursday Night Football (10 games, $50 million); though it is too early to say if the company will pursue future exclusive sports broadcasting rights. The company has since done deals that will deliver Prime subscribers 37 ATP tour events (previously owned by SKYAY), the AVP Beach Volleyball tour each of the next 3 summers and docu-series on Michigan Football.

Names to Watch: CBS, DIS, FOXA, CMCSA, FB, GOOGL, NFLX, AAPL, SKYAY

Howie Long-Short: NFL Senior VP, Digital Media, Vishal Shah recently said “we continue to think some of the best days are ahead [for traditional TV partners] despite some shifts in the media landscape.” That doesn’t sound like linear television will be excluded in the next round of negotiations, but the NFL is encouraging interested media companies to bid on both television and streaming rights for the leagues TNF package; leaving the door ajar for the tech giants to receive exclusivity for the first time.

Twitch: The Future of Game Broadcasts?

Twitch, the live-streaming platform most often associated with video games, has agreed to stream up to 6 live G-League (Gatorade sponsored NBA minor league) games. Broadcasts will include interactive overlays (viewers can click a team name/logo for player, team, game and season stats), a loyalty program to reward viewer engagement during broadcasts (i.e. custom emotes for group chat) and the ability for users to provide their own live commentary (over the game feed) via the Twitch co-streaming feature.

Names to Watch: CBS, DIS, FOXA, CMCSA, TWX, RCI, MSGN

Fan Marino: NBA Commissioner Adam Silver has gone on record stating he’d like to see changes in the way sports broadcasts are presented; pointing out the lack of live stats and chatter surrounding the broadcast, that gamers have become accustomed to. I’m not ready to give up Mike Breen, Marv Albert and Ian Eagle for Towelliee; but it’s worth watching to see if anyone else is.

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Foot Locker Shares Experience Largest Single-Day Percentage Gain in Company History

Foot Locker (FL) shares gained 28% on Friday, their largest single-day percentage gain ever, following the announcement of better than expected Q3 financials. The market responded overwhelmingly positive, despite a drop in YOY revenue (-.08% to $1.87 billion), same-store sales (-3.7%) and earnings per share. CEO Dick Johnson said the company will focus on its digital efforts to reenergize the business, believing that speeding up customer access to inventory is a way to maintain market share. FL is also banking on a NKE rebound, saying that company is “on the verge of a major breakthrough in terms of product innovation and customer engagement.”

Howie Long-Short: The best single day in shareholder history seems to indicate the company’s turnaround is nearly complete, but the financials don’t reflect that. FL says that basketball is on the rebound, kids’ sales are positively trending and the company is experiencing growth within its apparel line; but I’m not sure that news warrants the gains experienced. The company remains a middle man placing their eggs in NKE’s basket; a company that foresees their future in DTC business. Shares remain down 43% YTD. It’s worth noting that Finish Line (FINL) shares popped 7% following FL’s earnings beat.

Fan Marino: NKE is promoting a shoe that can make the wearer 4% more efficient when running. The Zoom Vaporfly 4% uses a light-weight foam found in airplane insulation and a small carbon fiber plate, shaped like a spoon (propels the runner forward), to provide the optimal balance of performance and weight. Does it work? Runners World tested the shoe and gave it “the highest values ever assigned in our lab”, but George Wu, a researcher at the University of Chicago Booth School of Business ran a study indicating the shoes decreased finishing times. I’m going to need more convincing before I spend $250 to shave 4% off my 12-minute mile.

Foot Locker: Wall Street’s Got a Foot in Its Mouth

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U.K. BASED SPORTS DIRECT IN TALKS TO ACQUIRE FINISH LINE

Reports indicate that Sports Direct (OTC: SDISY), the U.K.’s largest sporting goods retailer, is in talks to buy Finish Line (FINL). SDISY currently owns 8% of FINL, but a recently added “poison pill” shareholder rights plan, designed to prevent the unwanted takeover of the company, caps their potential ownership at 12.5%. It now appears that FINL’s adoption of the “poison pill” was a negotiating tactic, as opposed to a move to prevent a merger. Talks are apparently far enough along that an announcement could be made within the next several weeks.

Howie Long-Short: Susquehanna Group Analyst Sam Poser estimates that should the sale go through, the buy-out price would be $13.30. Sports Direct would continue to operate as Finish Line in the U.S., but would create a “DSW of athletic shoes” that would sell its lower priced sneakers. Considering shares are down 37% YTD, that 70% of its business comes from NKE products and that NKE is putting less stock in its wholesale business, shareholders would seem lucky to receive this bailout.

Fan Marino: FINL reports that 70% of its customer traffic comes from mobile, so the company has been focused on getting its web pages to load faster, providing customers with the ability to return products directly on the website and adding in-store beacon and geofencing technology to connect the digital and physical shopping experience. It makes no difference to me. I’m a sneaker guy, there are no technology enhancements that can be made to get me to shop from the bargain shoe bin.

Report: Finish Line In Merger Negotiations With Sports Direct

LULULEMON REPORTS Q2 GROWTH FIGURES; REMAINS ON TRACK TO HIT $4 BILLION IN REVENUE BY 2020

Lululemon (LULU) reported Q2 profits ($.39 compared with $.35) and sales (7% compared with 4%) that beat analysts’ estimates and updated full year forecasts ($2.35-$2.42/share) that topped projections. CEO Laurent Potdevin attributed the continued growth to improved marketing, an effort to drive international sales and an increased focus on their e-commerce business. The company has also been working to increase its appeal to men and add technical innovations to their clothing that set them apart in a crowded athletic-apparel marketplace. Potdevin reiterated that the yogawear brand remains on a trajectory to hit $4 billion in revenue by 2020.

Lululemon Posts Surprise Profit Growth In Q2, Raises Guidance

Howie Long-Short: You keep reading about the warning signs of the athleisure trend coming to an end, but I don’t believe that to be the case. FINL and FL are struggling because brands are going DTC, not because the consumer no longer wants to be comfortable outside the gym.

Fan Marino: Part of the reason analysts projected lower Q2 profits/earnings numbers was because of an uptick in online markdowns. That’s great news for fans of the brands! I checked out their “we made too much” section and it has a TON of stuff with at least a 25% discount.

PHARELL WILLIAMS AND A$AP FERG TAKE CREATIVE ROLES WITH ADIDAS; KENDRICK LAMAR LEAVES REEBOK FOR NIKE

As discussed here on JWS, Finish Line (FINL) recently announced that it has signed platinum hip hop group Migos to roles as creative directors, tasked with picking product, styling it for shoots and directing the production set. Since that announcement, several other partnerships have been unveiled. Pharrell Williams teamed up with Adidas (ADDYY) Originals to create a super-cool, 70’s-inspired tennis themed clothing line for the 2017 U.S. Open. A$AP Ferg reunited with Adidas Skateboarding to release apparel and footwear that will bring hip hop and skate together, drawing inspiration from vintage ADDYY track suits and the gritty NYC skateboarding scene and Kendrick Lamar announced that he has made the decision to leave Reebok (ADDYY) for a creative role with Team Nike (NKE).

Howie Long-Short: Adidas called their partnership with Kanye West “the most significant ever created between an athletic brand and a nonathlete”, and it’s hard to argue against that. The Chicago rapper single-handedly changed the perception of the athletic retailer. Now the company plans on opening stores dedicated solely to the Yeezy line.

Fan Marino: BIG fan of the Pharrell/Adidas line. This vintage tennis bag is the best of the collection. Interested in the A$AP FERG/Adidas line? It debuts TODAY; Friday, September 1st. Kendrick Lamar’s Nike collaboration is likely to focus around the Nike Cortez, which first debuted in 1972 and was re-released earlier this year.

FINISH LINE SCALES BACK FULL YEAR PROFITS ESTIMATES; ANNOUNCES POISON PILL TO PREVENT UNWANTED TAKEOVER ADVANCES

Finish Line (FINL) scaled back profits estimates after receiving disappointing preliminary sales figures (down 3.3% YOY for Q2), and the share price has since decreased by nearly 20%. Shareholders had anticipated low, single digit percentage gains, before expectations were reset. Same-store sales are now expected to fall 3-5% for the full year, with adjusted per-share profit estimates dropping to between $.50-$.60, from a forecast of $1.12-$1.23. CEO Sam Sato described the athletic footwear market to be “competitive and promotional”, confirming what DKS CEO Edward Stack said earlier in the month. The company also announced the adoption of a shareholder rights “poison pill” plan designed to prevent unwanted takeover advances, after U.K. based competitor Sports Direct International (LSE: SPD) raised its stake in the company from 9.2% to 19.9% in June.

Finish Line plunges 28% after trimming outlook as sporting goods stocks tumble

Howie Long-Short: Not familiar with Sports Direct International? The company owns 468 stores in the UK and another 289 Internationally. Its portfolio of brands also includes sporting equipment companies Dunlop (in most markets) and Everlast. SPD is working to expand into the U.S. market, having purchased 50 Bob’s Stores and Eastern Mountain Sports outdoor adventure schools in June.

Fan Marino: The Finish Line relies heavily on Nike, generating 70% of its sales on NKE products. I find that remarkable. Everything NKE produces eventually hits clearance. The company will run 25% off of clearance, several times/year. I find no benefit to shopping and paying retail on athletic shoes.

DURANT SAYS NO ONE WANTS TO PLAY IN UNDER ARMOUR SHOES; UAA SHARE PRICE DROPS

NBA star Kevin Durant stated on The Ringer’s “Bill Simmons Podcast” that “nobody wants to play in Under Armours”, and UAA shares have dipped 3% since. Durant was answering a question related to why Maryland, a one-time power, has been unable to recruit elite basketball players over the last 20 years. In 2014, UAA aggressively pursued Durant to sign an endorsement deal, but the Warrior’s star chose to resign with Nike (NKE) for an estimated $285 million over 10 years.

NBA star Kevin Durant slams Under Armour, and stock takes a dive

Howie Long-Short: Finish Line announced that it would be cutting its full year profits forecast amidst a highly promotional retail environment. The share price fell 18% thereafter. I’m attributing the 3% UAA drop to the statements released by FINL, not the off-hand comment from KD, who is from Maryland but chose to play at Texas.

Fan Marino: UCLA signed 4 5-star basketball recruits between 2016-2017; only Kentucky, Duke and Arizona had more. So perhaps it’s a Maryland issue, not an Under Armour issue.

FINISH LINE LOOKING TO CONNECT CUSTOMERS & SNEAKER CULTURE; SIGNS MIGOS AS CREATIVE DIRECTORS

The Finish Line, Inc. (FINL) has signed Migos to creative director roles with the retailer. The platinum award winning hip-hop trio will lead several marketing initiatives that will feature themselves along with other social media influencers. FINL is giving Migos the freedom to pick product and to style it, to develop the themes for upcoming product shoots and to direct their vision on the production set. The group plans to focus specifically on the shoe market, as FINL is looking to connect customers to sneaker culture.

Finish Line and Migos Join Forces for Creative Partnership

Howie Long-Short: FINL has posted 2 straight quarters of annual revenue declines, so a shake up on the creative side is welcomed. While this partnership may provide a short-term boost as Migos has reach, it doesn’t solve the problems associated with the shift to direct to consumer selling.

Fan Marino: Woah kemosabe, I guess expect a lot of same color tee shirts. White.